Munich Personal RePEc Archive

Strategies on initial public offering of

company equity at stock exchanges in

imperfect highly volatile global capital

markets with induced nonlinearities

Ledenyov, Dimitri O. and Ledenyov, Viktor O.

James Cook University, Townsville, Australia

18 February 2014

Online at https://mpra.ub.uni-muenchen.de/53769/

MPRA Paper No. 53769, posted 19 Feb 2014 10:22 UTC

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Strategies on initial public offering of company equity at stock exchanges in

imperfect highly volatile global capital markets with induced nonlinearities

Dimitri O. Ledenyov and Viktor O. Ledenyov

Abstract – This research considers the strategies on the initial public offering of company

equity at the stock exchanges in the imperfect highly volatile global capital markets with the

nonlinearities. We provide the IPO definition and compare the initial listing requirements on the

various markets. We analyze the IPO techniques: the fixed-price offerings, auctions, book-

building. We focus on the IPO initial underpricing, long-run performance and after market

liquidity problems. 1. We propose that the information absorption by the investors occurs in the

evolving learning process about the company’s value, taking to the consideration the

fundamental purpose of investing and the responsibilities of investors. 2. We think that the

information absorption capacity by the investors on the IPOs impacts the investor’s investment

decisions and serves as a pre-determinant for the successful IPO deal completion. We propose

the Ledenyov theory on the origins of the IPO underpricing and long term underperformance

effects, which states that the IPO underpricing and long term underperformance can be explained

by the changing information absorption capacity by the investors on the IPO value. 3. We think

that the IPO winning virtuous investment strategies can only be selected by the investors with the

highest information absorption capacity through the decision making process on the IPO

investment choices at the selected stock exchange in the imperfect highly volatile global capital

markets with the nonlinearities; applying the econophysical econometrical analysis with the use

of the inductive, deductive and abductive in the frames of the strategic choice structuring

process, that is the winning through the distinctive choices process.

JEL: D44, G00, G01, G10, G12, G14, G15, G18, G24, G30, G31, G32, H2, M10, O16, O18 .

PACS numbers: 89.65.Gh, 89.65.-s, 89.75.Fb .

Keywords: Information absorption, initial public offering (IPO), listing requirements,

mechanism choices, direct costs, underwriting, audit fees, selling commission, legal expenses,

indirect costs, certification, grading, market cycles, valuation, underpricing, overpricing, long

term under-performance, long term over-performance, investment strategy, inductive logics,

deductive logics, abductive logics, strategic choice structuring process, nonlinearities,

econophysics, econometrics, stock exchanges, imperfect highly volatile global capital markets.

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Introduction

Let us begin with the definition of the Initial Public Offering (IPO) as one of the business

transformation processes, described in the contemporary academic literature.

Wikipedia (2014) provides the following IPO definition: “An initial public offering (IPO)

or stock market launch is a type of public offering where shares of stock in a company are sold to

the general public, on a securities exchange, for the first time. Through this process, a private

company transforms into a public company. Initial public offerings are used by companies to

raise expansion capital, to possibly monetize the investments of early private investors, and to

become publicly traded enterprises. A company selling shares is never required to repay the

capital to its public investors. After the IPO, when shares trade freely in the open market, money

passes between public investors. Although an IPO offers many advantages, there are also

significant disadvantages, chief among these are the costs associated with the process and the

requirement to disclose certain information that could prove helpful to competitors, or create

difficulties with vendors.

Details of the proposed offering are disclosed to potential purchasers in the form of a

lengthy document known as a prospectus. Most companies undertake an IPO with the assistance

of an investment banking firm acting in the capacity of an underwriter. Underwriters provide

several services, including help with correctly assessing the value of shares (share price), and

establishing a public market for shares (initial sale). Alternative methods such as the Dutch

auction have also been explored. In terms of size and public participation, the most notable

example of this method is the Google IPO. China has recently emerged as a major IPO market,

with several of the largest IPOs taking place in that country.”

Chang-Yi Hsu, Jean Yu, Shiow-Ying Wen (2013) explain: “Initial public offering (IPO) is

one of the popular methods which corporation uses to finance their equity. IPOs can be either

small or large companies to raise expansion capital and become publicly traded enterprises.

Numerous studies provide that common stocks of IPOs usually get high abnormal returns during

the initial period, and then underperform during the post-issue period. There is no behavioral

theory to explain why investors would react so. Investors’ behavior is difficult to be predicted

and measured directly.”

Boeh, Southam (2011) notice: “The IPO is a key milestone that facilitates access to the

public capital market and provides investors with a liquid security with an established market

price. The decision to pursue an IPO is made by the top management team (TMT) and board in

consultation with investment bankers. In the US, after filing a registration statement with the

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Securities and Exchange Commission (SEC), the underwriters (UW) typically market the

security using a book-building process (see Benveniste and Spindt (1989)).”

Jiang, Leger (2009) present the IPO definition: “Initial public offering (IPO) refers to the

first sale of stocks by an unlisted company to the public. Stock exchange listing (followed by

public trading in open market) allows the creation of market prices and liquidity. Information

asymmetry and agency problems in the market make the valuation of IPOs more difficult than

that of listed common stocks so an essential part of the IPO process is the discovery of an

appropriate issue price. IPO pricing must compensate for both direct costs (such as underwriting

and information disclosure fees) and indirect costs (such as unknown risks specific to the

offering, as distinct from systemic risks generally involved in pricing listed common stocks). The

complex and special nature of IPO pricing is reflected in an ‘IPO underpricing’ phenomenon, in

which statistically significant positive abnormal returns are widely observed in the first day of

trading.”

Hopp, Dreherdo (2007) state: “One form of raising capital is selling a company’s shares

on capital markets – i.e., going public. Going public is generally done through Initial Public

Offering (IPO) where shares are sold to investors, usually at a price below those prevailing on

the first day of trading (see Ibbotson (1975) for early evidence).”

Pritsker (2004, 2006) writes: “Two of the principle functions of a well performing

financial system are to facilitate risk sharing among investors, and capital formation by firms.

The initial public offering (IPO) process serves both of these functions by allowing the initial

owners of a firm to raise capital while simultaneously transferring and sharing some of the firm’s

risk with the wider investing public.”

Mira (2004) suggests: “The initial public offering (IPO) is the process in which a

company offers its shares to the public and becomes a public company. Raising capital through

IPO plays an important role in corporate finance and enables economic growth. Indeed, in the

past decade, over $500 billion were raised through IPOs in the US markets.”

We would like to comment that the initial public offering of company equity at stock

exchanges has been researched in the research articles, reports, presentations and books by a big

number of prominent scientists from the top universities (see the compiled chronological list of

most frequently cited research articles): The auction of long-term government securities has been

researched in Berney (1964). The experimental studies of discrimination versus competition in

sealed-bid auction markets have been completed in Smith (1967). The cycle of research works by

Eugene F. Fama has been devoted to the dynamics of stock prices changes, including the IPOs.

The adjustment of stock prices to new information has been investigated in Fama, Fisher,

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Jensen, Roll (1969). A review of theory and empirical work on the efficient capital markets has

been conducted in Fama (1970). The cross-section of expected stock returns has been studied in

Fama, French (1992). The common risk factors in the returns on the stocks and bonds have been

listed in Fama, French (1993). The multifactor explanations of asset pricing anomalies have

been suggested in Fama, French (1996). The market efficiency, long-term returns, and

behavioral finance have been researched in Fama (1998). The obtained research results over the

years of intensive research have been shortly reviewed in Fama, Hansen, French (2013). The

stock market mechanism have been investigated in Akerlof (1970). The small business and the

new issues market for equities have been characterized in Stoll, Curley (1970). The problems of

valuation of the unseasoned equity issues in 1965-1969 in Logue (1973). The complicated

question: What’s special about the role of the underwriter reputation and market activities in the

IPOs?, has been clearly answered in Logue, Rogalski, Seward, Foster-Johnson (2001). The

further evidences on the short-run results for the new issues investors have been presented in

Reilly (1973). The pricing of initial equity issues with the focus on the French sealed-bid auction

has been discussed in McDonald, Jacquillat (1974). The hot IPOs issue markets have been

selected in Ibbotson, Jaffe (1975). The price performance of common stocks new issues has been

analyzed in Ibbotson (1975). The mechanisms of the initial public offering have been researched

in Ibbotson, Sindeler, Ritter (1988). The transactions cost approach to the theory of financial

intermediation has been explored in Benston, Smith (1976). The theory of the firm, including the

managerial behavior, agency costs and ownership structure, has been formulated in Jensen,

Meckling (1976). The agency costs of free cash flow, corporate finance, and takeovers have been

studied in Jensen (1986). The risk, uncertainty, and divergence of opinion have been selected as

the topics of research in Miller (1977). The informational asymmetries, financial structure, and

financial intermediation have been investigated in Leland, Pyle (1977). The seasoning process of

new corporate bond issue has been researched in Weinstein (1978). The prospect theory of the

decision making under the risk has been proposed in Kahneman, Tversky (1979). The auctions of

shares have been described in Wilson (1979). The measurement of security price performance

has been done in Brown, Warner (1980). The price discounts on the new equity issues in the UK

and their relationship to the investor subscription in the period 1965 - 1975 have been studied in

Buckland, Herbert, Yeomans (1981). The rational expectations, information acquisition, and

competitive bidding have been researched in Milgrom (1981). A theory of the auctions and

competitive bidding has been created in Milgrom, Weber (1982). The optimal auction design has

been suggested in Myerson (1981). A model of the demand for the investment banking advising

as well as the distribution services for the new issues have been described in Baron (1982). The

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flow of information has been researched in Dretske (1983). The valuable research contributions

by Jay R. Ritter are well known and highly regarded among the scientists. The innovation and

communication: Signaling with partial disclosure in Bhattacharya, Ritter (1983). The “hot issue”

market of 1980 has been researched in Ritter (1984). The signaling and the valuation of

unseasoned new issues: have been discussed in Ritter (1984). The investment banking,

reputation, and the underpricing of initial public offerings have been discussed in Beatty, Ritter

(1986). The costs of going public process have been calculated in Ritter (1987). The buying and

selling behavior of the individual investors at the turn of the year have been characterized in

Ritter (1988). The long-run underperformance of initial public offerings has been evaluated in

Ritter (1991). The measurement of the abnormal performance of the stocks has been completed

in Chopra, Lakonishok, Ritter (1992). The turn-of-the-year effect has been explained in Ritter

(1992). The going public problems have been discussed in Hanley, Ritter (1992). The market's

problems with the pricing of initial public offerings have been indentified in Ibbotson, Sindelar,

Ritter (1994). The international insights on the initial public offerings have been given in

Loughran, Ritter, Rydqvist (1994). The certain information about the initial public offerings has

been summarized in Ibbotson, Ritter (1995). The new issue puzzle has been indentified in

Loughran, Ritter (1995). The costs of raising capital have been estimated in Lee, Lochhead,

Ritter, Zhao (1996). The long-term market overreaction together with the effect of the low-priced

stocks has been considered in Loughran, Ritter (1996). The operating performance of firms,

conducting the seasoned equity offerings, has been analyzed in Loughran, Ritter (1997). The

new issue puzzle has been uncovered in Loughran, Ritter (1995). The initial public offerings

have been characterized in Ritter (1998a, b). The institutional affiliation and the role of venture

capital, using the evidences from the initial public offerings in Japan, have been researched in

Hamao, Packer, Ritter (1998). The valuation of the IPOs has been discussed in Kim, Ritter

(1999). The seven percent solution in the case of the IPOs has been proposed in Chen, Ritter

(2000). The institutional affiliation and the role of venture capital with the evidences from the

initial public offerings in Japan have been researched in Hamao, Packer, Ritter (2000). The

future of the new issues market has been forecasted in Ritter (2002). A review of the IPO

activity, pricing and allocations has been made in Ritter, Welch (2002). The decline of inflation

and the bull market of 1982 - 1999 have been well described in Ritter, Warr (2002). The

question: Why don’t the issuers get upset about the leaving money on the table in the IPOs?, has

been answered in Loughran, Ritter (2002). The behavioral finance has been described in Ritter

(2003a). The differences between the European IPOs market and the American IPOs market

have been found to exist in Ritter (2003b). The research topics on the investment banking and

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securities issuance have been studied in Ritter (2003c). The IPO quiet periods have been studied

in Ritter, Bradley, Jordan (2003). The IPO quiet periods have been found to exist in Ritter,

Bradley, Jordan, Wolf (2004). The question: Why has the IPO underpricing changed over the

time?, has been answered in Ritter, Loughran (2004). The recent developments in the corporate

finance have been discussed in Ritter (2005). The economic growth and the equity returns have

been researched in Ritter (2005). Some facts about the 2004 IPO market have been documented

in Ritter (2005). The short interest, institutional ownership, and stock returns have been

researched in Ritter, Asquith, Pathak (2005). The question: Do the today's trades affect the

tomorrow's IPO allocation?, has been replied in Ritter, Nimalendran, Donghang Zhang (2007).

The affiliated mutual funds and the allocation of initial public offerings have been considered in

Ritter, Donghang Zhang (2007). The analyst behavior, following the IPOs, has been studied in

Bradley, Jordan, Ritter (2008). The forensic finance has been discussed in Ritter (2008). The

testing theories of capital structure and the estimation of the speed of adjustment have been

researched in Ritter, Huang (2009). The economic consequences of the IPO spinning have been

discussed in Ritter, Xiaoding Liu (2010). The marketing of seasoned equity offerings has been

described in Ritter, Xiaohui Gao (2010). The local underwriter oligopolies and the IPO

underpricing have been discussed in Ritter, Xiaoding Liu (2011). The equilibrium in the initial

public offerings market has been described in Ritter (2011). The post-IPO employment and the

revenue growth for the US IPOs in the time period from 1996 up to 2010 have been researched

in Ritter, Kenney, Patton (2012). The Europe's second markets for the small companies have

been analyzed in Ritter, Vismara, Paleari (2012). The problem on the re-energizing of the IPO

market has been considered in Ritter (2013). The question: Where have all the IPOs gone?, has

been answered in Ritter, Xiaohui Gao, Zhongyan Zhu (2013). The economies of scope and the

IPOs activity in Europe have been characterized in Ritter, Signori, Vismara (2013). The

corporate financing and investment decisions in the case, when the firms have information that

the investors do not have, has been considered in Myers, Majluf (1984). The continuous auction

and insider trading problems have been researched in Kyle (1985). The asset pricing and the bid-

ask spread have been investigated in Amihud, Mendelson (1986). The shareholders and the stock

prices of the IPOs with the evidences from Japan have been characterized in Amihud,

Mendelson, Uno (1999). The allocations, adverse selection and cascades in the IPOs with the

evidences from the Tel Aviv stock exchange in Israel have been studied in Amihud, Hauser,

Kirsh (2001, 2003). The investment banking, reputation, and underpricing of the initial public

offerings have been overviewed in Beatty, Ritter (1986). A study of the executive compensation,

ownership, and board structure at the initial public offerings, including the managerial

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incentives, monitoring, and risk bearing, has been completed in Beatty, Zajac (1994). The issuer

expenses and legal liability in the initial public offerings have been researched in Beatty, Welch

(1996). The capital raising, underwriting and the certification hypothesis have been described in

Booth, Smith (1986). An empirical study on the efficiency of the British primary market and the

Swedish primary market with a particular accent on the problem of an access to the mentioned

stock markets has been completed in Ridder (1986). The question: Why new issues are

underpriced?, has been comprehensively discussed in Rock (1986). The problems on the large

shareholders and the corporate control have been analyzed in Shleifer, Vishny (1986). The

selected topics on the investor protection and equity markets have been characterized in Shleifer,

Wolfenzon (2002). The information quality and the valuation of new IPOs issues have been

considered in Titman, Trueman (1986). The coalition-proof of the Nash equilibria has been

proposed in Bernheim, Peleg, Whinston (1987). The auctions and bidding techniques have been

examined in McAfee, McMillan (1987). An examination of the mispricing, returns and

uncertainty for the initial public offerings has been done in Miller, Reilly (1987). The

underpricing of new IPOs issues and the choice of auditor as a signal of the investment banker’s

reputation has been studied in Balvers, McDonald, Miller (1988). The investment banker

prestige and the underpricing of initial public offerings have been investigated in Johnson, Miller

(1988). The anatomy of the initial public offerings of common stocks has been presented in Tinic

(1988). The signaling by the underpricing in the IPO market has been detected in Allen,

Faulhaber (1989). The initial public offerings underpricing has been researched in Barry (1989).

The role of venture capital in the creation of public companies, based on the evidence from the

going-public process, has been revealed in Barry, Muscarella, Peavy, Vetsuypens (1990). The

cycle of research articles co-authored by Lawrence M. Benveniste clarifies a big number of

important research problems in the IPO science. The problem: How investment bankers

determine the offer price and allocation of new issues has been studied in Benveniste, Spindt

(1989). A comparative analysis of the IPO proceeds under the alternative regulatory

environments has been made in Benveniste, Wilhelm (1990). The price stabilization as a bonding

mechanism in the new equity issues has been shown in Benveniste, Busaba, Wilhelm (1996). An

analysis of competing strategies for the IPOs such as the book-building vs. the fixed price has

been completed in Benveniste, Busaba (1997). The research on the initial public offerings, going

by the book, has been made in Benveniste, Wilhelm (1997). The complex question: Who benefits

from the secondary market price stabilization of the IPOs?, has been delicately answered in

Benveniste, Erdal, Wilhelm (1998). The evidence of information spillovers in the production of

investment banking services has been presented in Benveniste, Ljungqvist, Wilhelm, Yu (2003).

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The signaling and the pricing of new IPO issues have been considered in Grinblatt, Hwang

(1989). A direct test of the Rock’s model of the pricing of unseasoned issues has been conducted

in Koh, Walter (1989). The optimal multi unit auctions have been investigated in Maskin, Riley

(1989). A few research papers by Chris J. Muscarella have been considered as of particular

research interest, because of the uncovered theoretical mechanisms and practical causes of the

underpricing effect. A simple test of the Baron’s model of the IPO underpricing has been

suggested in Muscarella, Vetsuypens (1989a). The underpricing of second initial public offering

has been investigated in Muscarella, Vetsuypens (1989b). Some new empirical evidences on the

firm age, uncertainty, and IPO underpricing have been presented in Muscarella, Vetsuypens

(1990). The underpricing at stock exchanges in Germany in 1977 - 1987 has been researched in

Uhlir (1989). The series of research articles by Ivo Welch has to be highlighted certainly,

because of the innovative research proposals. The seasoned offerings and the pricing of new

issues have been researched in Welch (1989). The sequential sales, learning and cascades have

been investigated in Welch (1992). The theory and practical evidences on the equity valuation,

following the IPO, has been presented in Welch (1996). A review on the IPO activity, pricing

and allocations has been completed in Welch, Ritter (2002). The initial public offerings and

underwriter reputation have been analyzed in Carter, Manaster (1990). The underwriter

reputation, initial returns, and the long run performance of IPO stocks have been investigated in

Carter, Dark, Singh (1998). The empirical estimates of beta, when the investors face an

estimation risk, have been made in Clarkson, Thompson (1990). The evaluation methods have

been reviewed in Husson, Jacquillat (1990). The winner’s curse problem, interest costs and the

underpricing of initial public offerings have been researched in Levis (1990). The equity issues

and stock price dynamics have been considered in Lucas, McDonald (1990). The structure and

governance of venture capital organizations, which invest in the IPOs, have been analyzed in

Sahlman (1990). A lawyer's guide to the operation of underwriting syndicates has been written

by Allen (1991). Some remarks on the measurement of the information content of stock trades

have been presented in Hasbrouck (1991). The investor sentiment and the closed-end fund

puzzle have been highlighted in Lee, Shleifer, Thaler (1991). The venture capitalists certification

in the initial public offerings have been explained in Megginson, Weiss (1991). The introduction

to the corporate finance have been made in Megginson, Smart (2009). The problems on the

auditor credibility and the initial public offerings have been solved in Menon, Williams (1991).

The pre-play communication, participation restrictions and efficiency in the initial public

offerings have been discussed in Spatt, Srivastava (1991). The long run efficiency of the IPO

pricing has been considered in Cotter (1992). The litigation risk, intermediation, and the

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underpricing of initial public offerings have been studied in Hughes, Thakor (1992). Theory and

evidence on the effect of the secondary market on the pricing of the initial public offerings have

been presented in Mauer, Senbet (1992). The elaborate research ideas on the IPOs have been

proposed in a series of research articles by Reena Aggarwal The aftermarket performance of the

initial public offerings in Latin America has been researched in Aggarwal, Leal, Hernandez

(1993). The question: Why the initial public offerings are underpriced has been answered, using

the evidences from Switzerland in Kunz, Aggarwal (1994). The stabilization activities by the

underwriters after the initial public offerings have been investigated in Aggarwal (2000). The

price discovery in the initial public offerings as well as the role of the lead underwriter in the

initial public offerings have been documented in Aggarwal, Conway (2000). The empirical

evidences on the institutional allocations in the initial public offerings have been presented in

Aggarwal, Prabhala, Puri (2002). The strategic IPO underpricing, information momentum, and

lockup expiration selling have been studied in Aggarwal, Krigman, Womack (2002). The

allocation of the initial public offerings and flipping activity have been researched in Aggarwal

(2003). The effect of the trading system on the underpricing of initial public offerings has been

investigated in Affleck-Graves, Hegde, Miller, Reilly (1993). The theory and evidences on the

common stock offerings across the business cycle have been presented in Choe, Masulis, Nanda

(1993). The auctions of divisible goods have been researched in Back, Zender (1993). The

auctions of divisible goods with the endogenous supply have been researched in Back, Zender

(2001). The cycle of research articles by Thomas J. Chemmanur stems the idea of the IPO

waves. A dynamic model on the pricing of initial public offerings has been suggested in

Chemmanur (1993). The question: Why include warrants in new equity issues?, has been

answered in the theory of unit IPOs in Chemmanur, Fulghieri (1997). A theory of the going-

public decision has been proposed in Chemmanur, Fulghieri (1999). A dynamic model of the

choice between the fixed-price offerings and the auctions in the IPOs and privatizations has been

proposed in Chemmanur, Liu (2003). The institutional trading, allocation sales, and private

information in the IPOs have been discussed in Chemmanur, Hu (2007). The topics on the

product market advertising and new equity issues have been discussed in Chemmanur, Yan

(2009). The role of institutional investors in the seasoned equity offerings has been highlighted

in Chemmanur, He, Hu (2009). The going public decision and the product market have been

reviewed in Chemmanur, He, Nandy (2010). The heterogeneous beliefs, short sale constraints,

and an economic role of the underwriter in the IPOs have been explained in Chemmanur,

Krishnan (2012). The theory and evidences on the IPO waves, product market competition, and

going public decision have been presented in Chemmanur, He (2012). The long-term market

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overreaction or biases in the computed returns have been revealed in Conrad, Kaul (1993). The

short-run and long-run performance of the Korean IPOs in 1980-1990 have been researched in

Dhatt, Kim, Lim (1993). The IPO underpricing and the insurance against legal liability have been

described in Drake, Vetsuypens (1993). The options, short sales, and market completeness have

been researched in Figlewski, Webb (1993). The underpricing of the initial public offerings and

the partial adjustment phenomenon have been researched in Hanley (1993). Evidence on the

strategic allocation of initial public offerings has been given in Hanley, Wilhelm (1995). The

Japanese initial public offerings at the time of the Japan's financial markets restructuring have

been researched in Hebner, Hiraki (1993). The implications for the stock market efficiency have

been studied in Jegadeesh, Weinstein, Titman (1993a). An empirical investigation of the IPO

returns and subsequent equity offerings have been conducted in Jegadeesh, Weinstein, Welch

(1993b). The winner’s curse, legal liability, and long-run price performance of the initial public

offerings in Finland have been investigated in Keloharju (1993). The strategic behavior and

underpricing in the uniform price auctions, including the evidences from the Finnish treasury

auctions, have been described in Keloharju, Nyborg, Rydqvist (2004). The post-IPO

performances in France have been studied in Leleux (1993). The post-issue performance of the

IPOs in the European IPO markets has been studied in Leleux, Muzyka (1997). The UK

experience as far as the long-run performance of the initial public offerings in 1980 - 1988 has

been shared in Levis (1993). The UK IPO market in 2000 has been analyzed in Levis (2004). The

cycle of exceptional research articles by Tim Loughran presents the important research results on

the short- and long- term performances of the IPOs. The underperformance of the initial public

offerings, comparing the NYSE vs. NASDAQ data, has been analyzed in Loughran (1993). The

international insights on the initial public offerings have been presented in Loughran, Ritter,

Rydqvist (1994). The new issue puzzle has been researched in Loughran, Ritter (1995). The

operating performance of firms, conducting the seasoned equity offering, has been investigated

in Loughran, Ritter (1997). The uniformly least powerful tests of market efficiency have been

completed in Loughran, Ritter (2000). The problem: Why don’t the issuers get upset about

leaving the money on the table in the IPOs?, has been discussed in Loughran, Ritter (2002). The

question: Why has the IPO underpricing changed over time?, has been considered in Loughran,

Ritter (2003, 2004). The underwriter price support and the IPO underpricing puzzle have been

uncovered in Ruud (1993). The compensation, participation, restrictions, and the underpricing of

initial public offerings with the clear evidences from Sweden have been provided in Rydqvist

(1993). A reputation based model in the case of the New Zealand IPO underpricing has been

discussed in Vos, Cheung (1993). The accounting choices by the issuers of the initial public

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offerings have been reviewed in Friedlan (1994). The post-issue operating performances of IPO

firms have been analyzed in Jain, Kini (1994). The underpricing of the Canadian initial public

offerings in 1971 – 1992 has been researched in Jog, Srivastava (1994). The voluntary disclosure

of management earnings forecasts in the IPOs as well as the impact on the underpricing and

post-issue return performance in Jog, McConomy (1999). The question: Why the initial public

offerings are underpriced has been answered, using the evidences from Switzerland in Kunz,

Aggarwal (1994). The topics on the venture capitalists and the decision to go public have been

described in Lerner (1994). The pricing of initial public offerings with the focus on the tests of

the adverse-selection and the signaling theories has been discussed in Michaely, Shaw (1994).

The conflict of interest and the credibility of underwriter analyst recommendations have been

investigated in Michaely, Womack (1999). The aftermarket support and underpricing of the

initial public offerings have been researched in Schultz, Zaman (1994). The pseudo market

timing and the long-run underperformance of the IPOs have been discussed in Schultz (2003).

The underwriter price support and the IPO underpricing puzzle have been considered in

Degeorge (1995). The application of the book-building method in the IPOs has been described in

Degeorge, Derrien, Womack (2005). The private communications on the IPO underpricing, long

term performance and emerging issues markets have been conducted in Gerstein (1995, 1996).

The optimal investment, monitoring, and staging of venture capital have been described in

Gompers (1995). The topics on the venture capital and the creation of public companies have

been researched in Gompers, Lerner (1997). The really long-term performance of the initial

public offerings in the pre-Nasdaq era have been considered in Gompers, Lerner (2001, 2003a,

b). The aftermarket performance of the initial public offerings in Korea has been explained in

Kim, Krinsky, Lee (1995). The going public techniques in the 1980s with the evidences from

Sweden have been explained in Rydqvist, Högholm (1995). The underperformance in the long-

run stock returns, following the seasoned equity offerings, has been discussed in Spiess, Affleck-

Graves (1995). The IPO and the first seasoned equity sale, including the issue proceeds,

owner/manager's wealth, and under-pricing signal, have been researched in Spiess, Pettway

(1997). The long-run performance of stock returns, following the debt offerings, has been

described in Spiess, Affleck-Graves (1999). The insider ownership and the decision to go public

have been characterized in Zingales (1995). The series of research articles by Brad M. Barber

deals with the long-run abnormal stock returns. The detection of the long-run abnormal stock

returns, using the test statistics, has been described in Barber, Lyon (1996a, 1997). The problem:

How can the long-run abnormal stock returns be both positively and negatively biased?, has been

solved in Barber, Lyon (1996b). The effect of attention on the buying behaviour of the individual

12

and institutional investors has been characterized in Barber, Odean (2008). The ownership

dispersion, costly information, and IPO underpricing have been investigated in Booth J R, Chua

(1996). The technology shocks, regulation, and the IPO market have been researched in Booth J

R, Booth L (2003). The German perspective on the emission of shares has been provided in

Borggreve, Dobrikat (1996). The principles of corporate finance, including the IPO, have been

discussed in Brealey, Myers (1996). The market microstructure, asset pricing and stock returns

have been analyzed in Brennan, Subrahmanyam (1996). The international methods of the initial

public offerings allocation have been reviewed in Chowdhry, Sherman (1996). The stabilization,

syndication, and pricing of the IPOs have been discussed in Chowdhry, Nanda (1996). The

liquidity, information, and infrequently traded stocks have been considered in Easley, Kiefer,

O’Hara, Paperman (1996). The treatise on the law of securities regulation has been written by

Hazen (1996). The bank information monopolies as well as the mix of private and public debt

claims have been discussed in Houston, James (1996). The stock analyst valuations, following

the initial public offerings, have been analyzed in Houston, James, Karceski (2004). The market-

to-book ratios, equity retention, and management ownership in Finnish initial public offerings

have been researched in Keloharju, Kulp (1996). The coordination, identity and learning by the

firms before the IPO decision have been described in Kogut, Zander (1996). The measurement

of the long-horizon security price performance has been done in Kothari, Warner (1996, 1997).

The capital markets research has been performed in Kothari (2001). The Australian IPO

underpricing in the short and long run has been studied in Lee, Taylor, Walter (1996). The

expected and realized returns for the Singaporean IPOs in the short- and long- time terms have

been evaluated in Lee, Taylor, Walter (1996). The discriminatory treasury auctions versus

uniform treasury auctions: have been researched in Nyborg, Sundaresan (1996). The effect of

removing price limits and introducing auctions upon short-term IPO returns in the case of the

Japanese IPOs has been investigated in Pettway, Kaneko (1996). The approaches to the

prediction of stock results has been described in Périer (1996). The short and long-run

performance of the initial public offerings in the Austrian stock market have been discussed in

Aussenegg (1997). The cycle of research works by Alon Brav has been devoted to the short- and

long- time performances of the IPOs. The research on the long-run performance of the initial

public offerings, using the evidences from the venture and non-venture capital-backed

companies has been presented in Brav, Gompers (1997). The long-horizon IPO returns study,

using the Bayesian approach, have been completed in Brav (2000). The question: Is the

abnormal return, following the equity issuances, anomalous?, has been answered in Brav, Geczy,

Gompers (2000). The insider trading subsequent to the initial public offerings with the evidence

13

from the expirations of lockup provisions has been analyzed in Brav, Gompers (2002). The role

of lockups in the initial public offerings has been described in Brav, Gompers (2003). The

underpricing, ownership and control in the initial public offerings of equity securities in the UK

have been explained in Brennan, Franks (1997). The investment and operating performances of

the Japanese initial offerings have been characterized in Cai, Wei (1997). Some topics on the

persistence in the mutual funds performance have been discussed in Carhart (1997). The pricing

of initial public offers of corporate straight debt has been selected a a main subject of research in

Datta, Iskandar-Datta, Patel (1997). Some issues on the returns to the contrarian investment,

including the tests of the naïve expectations hypotheses, have been discussed in Dechow, Sloan

(1997). The relation between the analysts’ forecasts of the long-term earnings growth and the

stock price performance, following the equity offerings, has been derived in Dechow, Hutton,

Sloan (2000). The German capital market has been researched in Ehrhardt (1997). An analysis

of the stock market performance of new issues in New Zealand has been done in Firth (1997).

The bank underwriting of debt securities with the modern evidences has been described in

Gande, Puri, Saunders, Walter (1997). The bank entry, competition, and market for the

corporate securities underwriting have been reviewed in Gande, Puri, Saunders (1999). The

regulation “A” initial public offerings on the Internet have been researched in Gregg (1997). A

general approach to the characterization of the components of the bid-ask spread has been

discussed in Huang, Stoll (1997). The evaluation of the IPOs in Canada has been described in

Kooli (2000). The legal determinants of external finance have been defined in La Porta, Lopez-

de-Silanes, Shleifer, Vishny (1997). The law and the finance have been researched in La Porta,

Lopez-de-Silanes, Shleifer, Vishny (1998). The investor protection and the corporate valuation

have been investigated in La Porta, Lopez-de-Silanes, Shleifer (2002). The question: What works

in the securities laws? , has been answered in La Porta, Lopez-de-Silanes, Shleifer (2006). The

problem: Do firms knowingly sell overvalued equity?, has been solved in Lee (1997). The

research articles series by Alexander P. Ljungqvist perpetuates his original research ideas on the

IPO pricing. The pricing of the initial public offerings, using the further evidences from

Germany, has been researched in Ljungqvist (1997). The hot markets, investor sentiment, and

IPO pricing have been uncovered in Ljungqvist, Nanda, Singh (2001). The IPO allocations have

been studied in Ljungqvist, Wilhelm (2002). The IPO pricing in the dot-com bubble have been

described in Ljungqvist, Wilhelm (2003). The role of US banks and US investors in the process of

the global integration in the primary equity markets has been explained in Ljungqvist, Jenkinson,

Wilhelm (2003). The banking relationships and analyst recommendations during the competition

for the securities underwriting mandates have been shown in Ljungqvist, Marston, Wilhelm

14

(2003). The hot markets, investor sentiment, and IPO pricing have been highlighted in

Ljungqvist, Nanda, Singh (2003, 2006). The IPO underpricing has been selected as a subject of

discussion in Ljungqvist (2006). The ownership and operating performance of companies that go

public have been researched in Mikkelson, Partch, Shah (1997). An empirical investigation of

the impact of the IPO mispricing on the underwriter market value has been conducted in Nanda,

Youngkeol Yun (1997). The timing and subsequent performance of the initial public offerings

(IPOs) on the Johannesburg stock exchange have been described in Page, Reyneke (1997). The

analysis of valuation changes of the initial public offerings has been presented in Rajan, Servaes

(1997a). The effect of the market conditions on the initial public offerings has been described in

Rajan, Servaes (1997b). The IPO underpricing as the tax-efficient compensation has been

discussed in Rydqvist (1997). The size effect on the German capital market has been explained in

Stehle (1997). The German stock exchanges and capital market have been characterized in

Stehle, Ehrhardt (1999). The long-run stock performance of German initial public offerings and

seasoned equity issues have been analyzed in Stehle, Ehrhardt, Przyborowsky (2000). The

German re-unification, changing capital market conditions, and performance of German initial

public offerings have been considered in Steib, Mohan (1997). An empirical investigation of the

underpricing in Chinese IPOs has been conducted in Su, Fleisher (1997). The going public

decision making process and related problems have been described in Arkebauer (1998). The

evidence on the price stabilization and underpricing in the early IPO returns has been described

in Asquith, Jones, Kieschnick (1998). The demand reduction and inefficiency in the multi - unit

auctions have been researched in Ausubel, Cramton (1998a). The auctioning of securities has

been described in Ausubel, Cramton (1998b). The venture capital and the structure of capital

markets have been described in Black, Gilson (1998). The investor psychology and security

market under- and over- reactions have been studied in Daniel, Hirshleifer, Subrahmanyam

(1998). The corporate governance and the financial performance have been researched in

Goergen (1998). The prediction of the control concentration in the German and UK IPOs have

been described in Goergen, Renneboog (2002). The pricing of high-yield debt IPOs has been

investigated in Helwege, Kleiman (1998). The ownership structure, speculation, and shareholder

intervention have been characterized in Kahn, Winton (1998). The uniform price auctions have

been described in Malvey, Archibald (1998). The going public decision process and the

ownership structure of the firm have been discussed in Mello, Parsons (1998). The underpricing

and aftermarket performance of IPOs in Shanghai, P. R. China have been discussed in Mok, Hui

(1998). An empirical analysis: Why do the companies go public?, has been completed in

Pagano, Panetta, Zingales (1998). The choice of the stock ownership structure, including the

15

agency costs, monitoring and the decision to go public issues, have been researched in Pagano,

Röell (1998). The privatization of the initial public offerings in Malaysia, including the initial

premium and long-term performance, have been investigated in Paudyal, Saadouni, Briston

(1998). The asset pricing in the segmented capital markets, using the preliminary evidences from

China-domiciled companies, has been researched in Poon, Firth, Fung (1998). The earnings

management and the performances of seasoned equity offerings have been discussed in Rangan

(1998). The IPO underpricing, trading volume, and investor interest have been researched in

Reese (1998). The empirical evidence on the long-run performance of the initial public offerings

in Germany has been provided in Sapusek (1998). The IPO-mechanisms, monitoring and

ownership structure have been reviewed in Stoughton, Zechner (1998). The security design and

the allocation of voting rights, using the evidences from the Australian IPO market, have been

researched in Taylor, Whittred (1998). The earnings management and the underperformance of

seasoned equity offerings have been researched in Theoh, Welch, Wong (1998a). The earnings

management and the long-run market performance of initial public offerings have been

considered in Theoh, Welch, Wong (1998b). The initial public offerings on the Spanish stock

exchange have been analyzed in Ansotegui, Fabregat (1999). The initial public offerings in

Spain have also been considered in Arcas, Ruiz (1999). An analysis of executive compensation,

ownership, and control in closely held firms have been researched in Baker, Gompers (1999).

The equity share in the new issues and the aggregate stock returns have been investigated in

Baker, Wurgler (2000). The determinants of board structure at the initial public offering have

been identified in Baker, Gompers (2001). The international cross-listing and visibility have

been described in Baker, Nofsinger, Weaver (2002). The long-run performance analysis of a new

sample of the UK IPOs has been done in Brown (1999). The cycle of research articles by

Francesca Cornelli reflects the practical to the IPO book building techniques. The book building

and strategic allocations of the IPOs have been discussed in Cornelli, Goldreich (1999),

Cornelli, Goldreich (2001). The question: How informative is the order book?, has been

answered, considering the IPO book building methods in Cornelli, Goldreich (2002), Cornelli,

Goldreich (2003). The investor sentiment in the pre-IPO markets has been described in Cornelli,

Goldreich, Ljungqvist (2006). The relation between the analysts’ forecasts of the long-term

earnings growth and the stock price performance, following the equity offerings, has been

established in Dechow, Hutton, Sloan (1999). The research articles cycle by Field estimate the

IPO investments returns. The implementation of the anti-takeover provisions and dual class

shares before the IPO has been discussed with the aim to find the proper means to continue to

control the newly public firms in Field (1999). The expiration of the IPO share lockups has been

16

described in Field, Hanka (2001). The underpricing in the IPOs, including the control,

monitoring, or liquidity issues, has been researched in Field, Sheehan (2001). The takeover

defenses of IPO firms have been explained in Field, Karpoff (2002). The IPO underpricing and

the outside block holdings have been researched in Field, Sheehan (2002). The problem of the

institutional investment versus the individual investment in the IPOs has been discussed in Field,

Lowry (2009). An analysis of IPO auctions has been done in Kandel, Sarig, Wohl (1999). The

long-run performance of IPOs has been analyzed in Khurshed, Mudambi, Goergen (1999). The

short-run price performance of investment trust IPOs on the UK main market has been

researched in Khurshed, Mudambi (2002). The persistence of the IPO mispricing and the

predictive power of flipping have been researched in Krigman, Shaw, Womack (1999). The

question: Why do the firms switch underwriters?, has been answered in Krigman, Shaw,

Womack (2001). The IPO underpricing explanations with the implications from the investor

application and allocation schedules have been suggested in Lee, Taylor, Walter (1999). The

improved methods for the tests of the long-run abnormal stock returns have been proposed in

Lyon, Barber, Tsai (1999). The question: What makes a company a good candidate for the going

public process, including the criteria, advantages, and disadvantages, related to the going public

process, has been discussed in Olson, Nelson (1999). The managerial ownership and the

performance of the firms with the evidences from the UK have been described in Short, Keasey

(1999). The globalization, corporate finance, and cost of capital have been considered in Stulz

(1999). The limits of the financial globalization have been set in Stulz (2005). The securities

laws, disclosure, and national capital markets in the age of financial globalization have been

described in Stulz (2009). The going public decision and the development of financial markets

have been researched in Subramanyam, Titman (1999). A comparison of current approaches to

the identification of the unexpected accruals has been done in Thomas, Zhang (1999). The

question: What drives the initial market performance of the Italian IPOs?, has been replied

during an empirical investigation on the underpricing and price support in Arosio, Giudici,

Paleari (2000). The problem: Why do (or did?) the Internet-stock IPOs leave so much money on

the table?, has been considered in Arosio, Giudici, Paleari (2001). The privatization versus

private sector initial public offerings in Poland have been researched in Aussenegg (2000). The

accuracy of the price-earnings and discounted cash flow methods of the IPO equity valuation has

been found in Berkman, Bradbury, Ferguson (2000). The treasury auctions: have been

researched in Binmore, Swierzbinski (2000). The question: Do underwriters encourage the stock

flipping?, including a new explanation for the under-pricing of IPOs, has been answered in

Boehmer, Fishe (2000). The equilibrium rationing in the initial public offerings of equity has

17

been researched in Boehmer, Fishe (2001). The problem: Who receives the IPO allocations?, has

been researched, conducting the analysis of ‘regular’ investors, in Boehmer, Fishe (2005). The

identification of the hot and cold IPO markets has been done, using a regime switching model, in

Brailsford, Heaney, Powell, Shi (2000). The modeling of the behavior of the new issue market

has been completed in Brailsford, Heaney, Shi (2004). The post-issue market performance of the

IPOs in P. R. China’s new stock markets has been studied in Chen, Firth, Kim (2000). The

information effects of analyst activity at the announcement of the new equity issues have been

considered in D’Mello, Ferris (2000). The timing of the initial public offerings has been

discussed in Draho (2000). The factors, affecting the investment bank initial public offering

market share, have been listed in Dunbar (2000). The withdrawn IPOs that return to the market

for a second time have been researched in Dunbar, Foerster (2008). The ownership structure and

initial public offerings in the small economies such as Portugal have been studied in Duque,

Almeida (2000). The research articles cycle by B Espen Eckbo presents an objective analysis on

the IPO returns. The resolution of the new issues puzzle has been suggested in Eckbo, Masulis,

Norli (2000). The leverage, liquidity, and long-run IPO returns have been researched in Eckbo,

Norli (2001). The liquidity risk, leverage, and long-run IPO returns have been analyzed in

Eckbo, Norli (2002, 2005). The corporate finances have been discussed in Eckbo (2008). The

question: When the underwriter is the market maker, accenting on the examination of trading in

the IPO aftermarket?, has been replied in Ellis, Michaely, O’Hara (2000). The shares trading at

the Nasdaq stock exchange has been researched in Ellis, Michaely, O’Hara (2002). An empirical

examination of the Italian situation with the IPOs, including the asymmetric information flows

and the underpricing, has been conducted in Fabrizio (2000). The capital markets have been

studied in Foerster (2000). An equilibrium theory of rationing has been proposed in Gilbert,

Klemperer (2000). The question: Does the presence of venture capitalists improve the survival

profile of IPO firms?, has been answered in Jain, Kini (2000). The initial and after market

performances of the IPOs in the emerging markets, using the evidences from the Istanbul stock

exchange in Turkey, have been researched in Kiymaz (2000). The prices, liquidity, and the

information content of trades have been investigated in Koskie, Michaely (2000). The busted

IPOs and windows of misopportunity have been considered in Lewis, Seward, Foster-Johnson

(2000). The investments at the German stock exchanges have been evaluated in Löffler (2000).

The performance of the shares by the Deutschen Telekom AG at the German stock exchanges has

been researched in Reuschenbach (2000). An empirical study on the benchmark - sensitivity of

the IPO-long-run performance in Germany has been completed in Sapusek (2000). The timing of

the initial public offerings has been investigated in Schultz (2000). The pseudo market timing

18

and the long-run underperformance of IPOs have been studied in Schultz (2001). The question:

Do the individuals closest to the Internet firms believe they are overvalued?, has been replied in

Schultz, Zaman (2001). The Internet direct public offerings have been regarded as the new

opportunities for the small business capital finance in Sinclair (2000). The cycle of research

papers by Ann E. Sherman has been written with the particular accent on the IPO methods. The

numerous advantages of the IPO book building method have been listed in Sherman (2000). The

global trends in the IPO methods, comparing the book building versus the auctions, have been

analyzed in Sherman (2001, 2003). The IPO underpricing and participation limits with the costly

information have been researched in Sherman, Titman (2002). The problem on the control as a

motivation for the underpricing together with a comparison of the dual- and single- class IPOs

has been researched in Smart, Zutter (2000). The long-run stock performance of the German

initial public offerings and seasoned equity issues have been considered in Stehle, Ehrhardt,

Przyborowsky (2000). The essays on the initial public offerings, including the empirical findings

from the Helsinki stock exchange, have been written by Westerholm (2000). The IPO-related

organizational change and the long-term performance have been studied in Von Eije, de Witte,

van der Zwaan (2000). The problems on the evolution of overconfidence and the entrepreneurs

have been analyzed in Bernardo, Welch (2001). An empirical analysis on the venture capital and

the IPO lockup expiration have been completed in Bradley, Jordan, Ha-Chin Yi, Roten (2001).

The partial adjustment to the public information and the IPO underpricing have been studied in

Bradley, Jordan (2002). The IPOs have been discussed in Bradley, Jordan, Ritter (2003). The

analyst behavior following the IPOs, including the “bubble period” evidence, has been analyzed

in Bradley, Jordan, Ritter (2008a). The question: Are there long-run implications of analysts’

coverage for the IPOs?, has been replied in Bradley, Chan, Kim, Singh (2008b). The empirical

analysis on the option to withdraw the IPOs during the premarket time period has been

conducted in Busaba, Benveniste, Guo (2001). The effects of founder management among the

IPO-stage new ventures have been characterized in Certo, Covin, Daily, Dalton (2001). The

IPOs underpricing and the IPOs long-term performance in P. R. China have been researched in

Chan, Wang, Wei (2001). The IPO initial returns and the underwriter reputation in the 1990s

have been researched in Cooney, Singh, Carter, Dark (2001). The question: Do the IPO charters

maximize the firm value? Has been discussed in the frames of the antitakeover protection

schemes in the IPOs in Daines, Klausner (2001). The problem: Why do the option introductions

depress the stock prices?, has been answered during an empirical study on the diminishing short-

sale constraints in Danielsen, Sorescu (2001). The research on the IPO performance and earnings

expectations with the application of French evidences has been conducted in Degeorge, Derrien

19

(2001a). The long term performance of stocks at the stock exchanges in France has been

investigated in Degeorge, Derrien (2001b). The problem: Why was the Internet IPO

underpricing so severe?, has been replied in DuCharme, Rajgopal, Sefcik (2001). An empirical

investigation on the underpricing of the venture and non-venture capital IPOs has been

completed in Francis, Hasan (2001). The stocks performances at the stock exchanges have been

researched in Gerke, Fleischer (2001). The theory and evidences on the underpricing and

entrepreneurial wealth losses have been presented in Habib, Ljungqvist (2001). The liquidity and

the initial public offering underpricing problems have been researched in Hahn, Ligon (2004).

The question: Do the investment banks compete in the IPOs?, has been answered in Hansen

(2001). The managerial optimism and the corporate finance have been studied in Heaton (2001).

The initial public offerings in the hot and cold markets have been researched in Helwege, Liang

(2001, 2004). The clustering of the initial public offerings, information revelation and

underpricing have been investigated in Hoffmann-Burchardi (2001). The law and finance

analysis of the initial public offerings has been completed in Holmén, Högfeldt (2001). The

divergence of opinions, uncertainty, and quality of initial public offerings have been reviewed in

Houge, Loughran, Suchanek, Yan (2001). The decomposition and testing of the long-term

returns in the case of the Danish IPOs have been made in Jakobsen, Sørensen (2001). A number

of research articles by Tim Jenkinson has been written with a particular attention to the European

IPOs. The theory and multiple evidences on how companies raise the equity finance have been

documented in Jenkinson, Ljungqvist (2001). The European IPO book-building has been

selected as a main theme of discussion in Jenkinson, Jones (2004). The important question: Why

are the European IPOs so rarely priced outside the indicative price range?, has been raised in

Jenkinson, Morrison, Wilhelm (2006). The economics of the IPO stabilization, syndicates and

naked shorts has been described in Jenkinson, Jones (2007). The 12 secrets of investing in the

IPOs have been revealed in Killian, Smith, Smith (2001). The interesting research articles cycle

by Michelle Lowry explains the IPO valuation techniques. The biases in the IPO pricing process

have been characterized in Lowry, Schwert (2001). The IPO market cycles, including the

problem of sequential learning on the IPO bubbles, have been characterized in Lowry, Schwert

(2002). The litigation risk and the IPO under-pricing have been considered in Lowry, Shu (2002).

The question: Why does the IPO volume fluctuate so much?, has been answered in Lowry

(2003). The stocks performances at the stock exchanges have been researched from the German

perspective in Mager (2001). The technological innovation and the initial public offerings have

been correlated in Maksimovic, Pichler (2001). The question: Are the IPOs underpriced?, has

been replied in Purnanandam, Swaminathan (2001). The underpricing and overpricing of the

20

IPOs in the German capital markets have been described in Rehkugler, Schenek (2001). The

modification of the company property rights structure at the stock exchange has been discussed

in Schatt, Roy (2001). The activities by the company’s stock holders during the IPO have been

analyzed in Schatt, Broye (2003). The question: Do the individual closest to the Internet firms

believe they are overvalued?, has been answered in Shultz, Zaman (2001). The research articles

by Sentis explain the recent trends in the IPOs from the French perspective. The operation

performances of companies during the IPO in France in 1991 - 1995 have been researched in

Sentis (2001). The initial public offerings, including the good, the bad and the liars problems

have been investigated in Sentis (2002). The international approach to the introduction of various

companies at the stock exchange has been analyzed in Sentis (2004). The discussions on the

ownership structure and the performance of firms with the evidences from France have been

presented in Severin (2001). The IPOs and the product quality problems have been correlated in

Stoughton, Wong, Zechner (2001). The question: What determines the IPO gross spreads in

Europe?, has been replied in Torstila (2001). The clustering of the IPO gross spreads together

with the international evidences has been considered in Torstila (2003). The post-IPO capital

expenditures and the market feedback have been studied in Van Bommel, Vermaelen (2001). The

initial returns and the long-run performance of private equity-backed initial public offerings on

the Amsterdam stock exchange have been described in Van Frederikslust, Van der Geest (2001).

The question: Why do the IPO underwriters allocate the extra shares, when they expect to buy

them back?, has been replied in Zhang (2004). An optimal IPO mechanism has been suggested

in Biais, Bossaerts, Rochet (2002). The IPO auctions: English, Dutch, ... French and Internet

have been researched in Biais, Faugeron-Crouzet (2002). The detection of the financial time

series turning points has been conducted in the frames of the new CUSUM approach in

application to the IPO cycles, in Blondell, Hoang, Powell, Shi (2002). The problem on the choice

of the IPO versus the takeover with the empirical evidences has been researched in Brau,

Francis, Kohers (2002). The initial public offerings together with the evidences from the British,

Swedish and French property share markets have been characterized in Brounen, Eichholtz

(2002). The prices and the winners curse have been studied in Bulow, Klemperer (2002). The

strategic share allocation, information content of pre-listing characteristics, listing-day trading

activities, and under-pricings of IPOs have been researched in Cheng, Mak, Chan (2002). The

valuation of IPOs by the investment banks and the stock market have been investigated in

Deloof, de Maeseneire, Inghelbrecht (2002). The auctions vs. the book building in addition with

the control of underpricing in the hot IPO markets have been discussed in Derrien, Womack

(2002). The use of the forecasts of earnings to simultaneously estimate the growth and the rate of

21

return on the equity investments have been researched in Easton, Taylor, Shroff, Sougiannis

(2002). The PE rations, PEG rations, and estimating the implied expected rate of return on the

equity capital have been selected as the topics of the research in Easton (2004). The use of the

forecasts of earnings to estimate and compare the cost of capital across the regimes has been

discussed in Easton (2006). The effect of the analysts’ optimism on the estimates of the expected

rate of return, implied by the earnings forecasts, has been characterized in Easton, Sommers

(2007). The IPO at the stock exchange in France have been studied in Faugeron-Crouzet,

Ginglinger (2002). The board composition, share ownership, and ‘underpricing’ of the UK IPO

firms have been reviewed in Filatotchev, Bishop (2002). The question: How the stock flippers

affect the IPO pricing and stabilization?, has been raised in Fishe (2002). The divergence of

opinion and the IPO long-term performance have been investigated in Gao, Mao, Zhong (2002).

The pricing of the initial public offerings in Europe has been researched in Giudici, Roosenboom

(2002). The pricing of the initial public offerings on the ‘new’ European stock markets has also

been investigated in Giudici, Roosenboom (2005). The divergence of opinion, uncertainty, and

quality of the initial public offerings have been considered in Houge, Loughran, Suchanek,

Xuemin Yan (2002). The ownership control and the operating performance in an emerging

market with the multiple evidences from the Thai IPO firms have been discussed in Kim,

Kitsabunnarat, Nofsinger (2002). The underpricing and the long-term performance of the initial

public offerings at Germany’s new market in 1997 – 2001 have been researched in Kiss, Stehle

(2002). The ownership structure pre- and post - IPOs and the operating performance of the

JASDAQ companies have been researched in Kutsuna, Okamura, Cowling (2002). The question:

What is special about the roles of underwriter reputation and market activities in the initial public

offerings?, has been replied in Logue, Rogalski, Seward, Foster-Johnson (2002). A survey of

recent literature on the multi unit auctions has been written by Martimort (2002). The corporate

supervision in the Netherlands has been described in Moerland (2002). The IPOs underpricing at

the stock exchanges and the reputation of the underwriters in Germany have been discussed in

Schiereck, Wagner (2002). The cross-section of the European IPO returns has been analyzed in

Schuster (2002). The IPOs insights from the seven European countries have been presented in

Schuster (2003). The auctioning divisible goods problem has been discussed in Wang, Zender

(2002). The endogeneity of the IPOs being underwritten by the prestigious underwriters has been

highlighted in Xie (2002). The residual income risk, intrinsic values and share prices have been

described in Baginski, Wahlen (2003). The law firm prestige and the performance in the IPOs,

including the problem of the underwriters’ counsel as gatekeeper, have been analyzed in

Barondes, Nyce, Sanger (2003). Some immodest proposals on the IPO reform have been made in

22

Bartlett, Shulman (2003). The institutional participation in the IPOs has been discussed in Binay,

Pirinsky (2003). The strategic price discounting and rationing in the uniform price auctions have

been studied from the French point of view in Bourjade (2003, 2008). The all-stars analyst

turnover, investment bank market share, and the performance of the initial public offerings have

been analyzed in Clarke, Dunbar, Kahle (2003). The auctions versus the book building and the

control of underpricing in hot IPO markets have been considered in Derrien, Womack (2003).

The 25 years of the Dutch IPOs, including the examination of frequently cited IPO anomalies

within the main sectors and during the hot and cold issue periods, have been discussed in

Doeswijk, Hemmes, Venekamp (2005). The Italian perspective on the IPO underpricing and

after-market liquidity has been given in Ellul, Pagano (2003). The short and long-run

performances of high-tech initial public offerings in the European new IPO markets have been

analyzed in Goergen, Khurshed, McCahery, Renneboog (2003). The initial and aftermarket

performances of IPOs with the evidences from the Athens stock exchange have been given in

Gounopoulos (2003). The contingent effects of inter-organizational partnerships on the IPO

success have been described in Gulati, Higgins (2003). The effects of upper echelon affiliations

on the underwriter prestige have been found in Higgins, Gulati (2003). The strategic

underwriting in the initial public offerings has been considered in Hoberg (2003). The analysts

forecasts examination, including the biased earnings forecasts, has been done in Hong, Kubik

(2003). The IPO structuring problem with the empirical evidences on the primary and secondary

portion has been studied in Huyghebaert, Van Hulle (2003). The privatization of the initial

public offerings, using the Polish experience, has been researched in Jelic, Briston (2003). The

auctions versus the book-building methods in the Japanese IPOs have been discussed in Kaneko,

Pettway (2003). The question: Are the financial assets priced locally or globally?, has been

answered in Karolyi, Stulz (2003). The post-IPO performance and the exit of venture capitalists

have been reviewed in Kraus, Burghof (2003). The recommendations on the choice of the

investment bank, when going public, have been made in Lemmens (2003, 2007). The Internet &

capital raising as a perfect match have been discussed in Lemmens (2004, 2007). The

underpricing or overvaluation of the initial returns have been researched, using the evidences

from the EASDAQ and Euro N M, have been presented in Manigart, de Maeseneire (2003). The

long term performance of initial public offerings in the German capital markets has been

investigated in Neuhaus, Schremper (2003). The Greek initial public offerings in 1994 – 2002

have been analyzed in Nounis (2003). The rise and fall of Internet stock prices have been

estimated in Ofek, Richardson (2003). The evaluation of the riskiness of the initial public

offerings in 1980 – 2000 has been done in Peristiani (2003). The underpricing, stock allocation,

23

ownership structure and post-listing liquidity of newly listed firms have been researched in

Pham, Kalev, Steen (2003). The research articles series by Roosenboom includes the thoughtful

discussions on the IPOs issues from the Dutch perspective. The takeover defenses and the IPO

firm value in the Netherlands have been considered in Roosenboom, van der Goot (2003). The

earnings management and the initial public offerings have been analyzed, using the evidences

from the Netherlands, in Roosenboom, van der Goot, Mertens (2003). The effect of ownership

and control on the market valuation has been characterized, applying the evidences from the

initial public offerings in the Netherlands, in Roosenboom, van der Goot (2005). The question:

How do the underwriters value the IPOs?, has been replied, using an empirical analysis of the

French IPO market, in Roosenboom (2007). The control as a motivation for the underpricing,

have been researched, completing a comparison on the dual- and single-class IPOs, in Smart,

Zutter (2003). The post-IPO capital expenditures and the market feedback have been

investigated in Van Bommel, Vermaelen (2003). The risk, quality of intermediaries and legal

liability in the Netherlands IPO market have been researched in Van der Goot (2003). The

question: Do the expert informational intermediaries add value?, has been replied, using the

evidences from the auditors in the microcap IPOs, in Weber, Willenborg (2003). The monitoring

as a motivation for the IPOs underpricing has been studied in Arugaslan, Cook, Kieschnick

(2004). The shareholder diversification and the IPOs problems have been discussed in Bodnaruk,

Kandel, Massa, Simonov (2004). The initial public offerings have been researched, using the

evidences from the UK, in Burrowes, Jones (2004). The IPO underpricing in Italy has been

characterized in Cassia, Giudici, Paleari, Redondi (2004). The valuation of firms listed on the

Nuovo Mercato has been described in Cassia, Paleari, Vismara (2004). The IPOs valuation

accuracy and infinity horizon forecast, using the empirical evidences from Europe, have been

discussed in Cassia, Vismara (2009). The long-run abnormal return after the IPOs and optimistic

analysts’ forecasts have been found to exist in Chahine (2004a). The IPOs underpricing versus

the gross spreads have been researched, using the new evidences on the effects of sold shares at

the time of IPOs, in Chahine (2004b). The offering price clusters and the underpricing in the US

primary market have been considered in Chiang, Harikumar (2004). The question: Do the initial

public offering firms purchase the analysts’ coverage with the underpricing?, has been clearly

answered in Cliff, Denis (2004). The development of the secondary market liquidity for the

NYSE-listed IPOs has been described in Corwin, Harris, Lipson (2004). The value enhancing

capital budgeting and the firm-specific stock return variation have been characterized in Durnev,

Morck, Yeung (2004). The question: How do the firms and underwriters choose each other?, has

been replied in Fernando, Gatchev, Spindt (2004). The capital markets have been precisely

24

characterized in Foerster (2004). A legal and economic analysis of the preferential allocation of

shares in the initial public offerings, including the spinning and underpricing effects, has been

completed in Griffith (2004). A proposal to restrict the manipulative strategy in the IPOs

auctions has been discussed in Ganor (2004). The liquidity and initial public offering

underpricing have been studied in Hahn, Ligon (2004). The laddering in the initial public

offerings has been indentified in Hao (2004). The initial public offerings in the hot and cold

markets have been characterized in Helwege, Liang (2004). The strategic underwriting in the

initial public offers has been investigated in Hoberg (2004). The aftermarket performance of the

initial public offerings in Canada has been researched in Kooli, Suret (2004). The role of

allocation rules in the divisible good auctions has been described in Kremer, Nyborg (2004a).

The underpricing and market power in the uniform price auctions have been discussed in

Kremer, Nyborg (2004b). The question: Why does the book-building drive out the auction

methods of the IPO issuance?, has been researched, using the evidences from Japan, in

Kutsuma, Smith (2004). The short sale constraints and overpricing have been investigated in

Lamont (2004). The grandstanding, certification and the underpricing of the venture capital

backed IPOs have been discussed in Lee, Wahal (2004). The law and economics of the IPO

favoritism and regulatory spin have been researched in Levy (2004). The IPO underpricing und

long term performance in Germany have been investigated in Lubig (2004). The question: How

do the exchanges select the stocks for the option listing has been discussed in Mayhew, Mihov

(2004). The short sale constraints, overvaluation, and introduction of options have been selected

as the topics of research in Mayhew, Mihov (2005). A proposal to restrict the manipulative

strategy in the auction IPO's has been made in Mira (2004). The grandstanding, certification and

the underpricing of venture capital backed IPOs have been discussed in Peggy, Wahal (2004).

The discussion on the brokers as the network "architects" in the IPOs deals on the US IPO

market has been conducted in Pollock, Porac, Wade (2004). The subject on the signalling value

of the IPOs’ prestigious affiliates has been investigated in Pollock, Chen, Jackson, Hambrick

(2005). The research articles series by Matt Pritsker formulates the theory of IPO underpricing

and underperformance. The implications for the equilibrium asset returns, shock absorption and

liquidity in the case of big investors have been discussed in Pritsker (2004). A fully-rational

liquidity-based theory of IPO underpricing and underperformance has been created in Pritsker

(2004, 2005, 2006). The problem: Are the IPOs really underpriced has been evaluated in

Purnanandam, Swaminathan (2004). The IPO stocks at the stock exchanges in Germany have

been estimated in Rath, Tebroke, Tietze (2004). The problem: Are the IPO allocations for the

sale?, has been researched, using the multiple evidences from the mutual fund industry, in Reuter

25

(2004). The nanotech IPOs have been investigated in Rice (2004). The use of the electronic

Dutch auction in the case, when the nanotech company goes public, has been discussed in Rice

(2006). The performance of the venture-backed IPOs on the Europe's new stock markets has

been researched with the application of the evidences from France, Germany and the UK in

Rindermann (2004). The valuation of new firms in the uncertain markets has been studied in

Sanders, Boivie (2004). The effect of bank relationships on the firm’s cost of equity in its IPO

has been selected to research in Schenone (2004). The operating performance of the French IPO

firms has been researched in Serve (2004). The IPO market timing has been discussed in Alti

(2005). The problem: How persistent is the impact of market timing on capital structure?, has

been researched in Alti (2006). The long-run performance of the initial public offerings in the

Spanish capital market has been considered in Alvarez, Gonzalez (2005). The right timing of the

initial public offerings has been set in Benninga, Helmantel, Sarig (2005). The problem on the

forecasting of the market capitalization prior to an initial public offering has been researched,

using the Google’s evaluation as an example, in Berg, Neumann, Rietz (2005). The stock market

liquidity and the cost of issuing equity have been discussed in Butler, Grullon, Weston (2005).

The Dutch auction technique has been well described, using the Google IPO as an example, in

Choo (2005). The role of the IPO underwriting syndicates, including the pricing, information

production, and underwriter competition, has been investigated in Corwin, Schultz (2005). The

question: Who leaves the money on the table?, has been answered during the research on the IPO

pricing in the hot market conditions in Derrien (2005). The initial public offerings of the listed

firms have been studied in Derrien, Kecskés (2006). The venture capitalist certification of the

IPOs has been described in Dolvin (2005). The long-run performance of the initial public

offerings has been researched, applying the evidences in Switzerland, in Drobetz, Kammermann,

Wälchli (2005). The Italian perspective on the corporate and investment banking has been

provided in Forestieri (2005). The Dutch auction approach as an alternative to the firm

commitment underwriting has been discussed with particular attention to the characteristic

example of the Google, Inc in Hess (2005). The moral hazard and the initial public offering

problems have been researched in Hurt (2005). The question: What the Google can't tell us about

the Internet auctions (and what it can)?, has been replied in Hurt (2006). A closer examination of

the problem: Are the IPOs underpriced?, has been conducted in Jagannathan, Gao (2005). The

IPO industry clustering has been discussed in Jain, Kini (2005). The long-run IPO performance

analysis of the German and Spanish family-owned businesses has been analyzed in Jaskiewicz,

Gonzàlez, Menéndez, Schiereck (2005). The inelastic banking capacity in the primary issue

market has been researched, showing the situations, when the good IPOs may draw into the bad

26

IPOs, in Khanna, Noe, Sonti (2005, 2008). The asymmetric information flows in the IPO

aftermarket has been detected in Li, McInish, Wongchoti (2005a). The underpricing, share

retention, and IPO aftermarket liquidity have been researched in Li, Zheng, Melancon (2005b).

The application of the tilting of the supply schedule to enhance the competition in the uniform

price auctions has been discussed in LiCalzi, Pavan (2005). The geography of the equity analysis

has been discussed in Malloy (2005). The Greek IPO initial returns and the price cap constraints

have been studied, using the evidences from the Athens stock exchange in 1994-2003, in Nounis

(2005). The initial returns, long run performance, and characteristics of issuers have been

studied, researching the differences in the Indian IPOs after the fixed price and book building

processes, in Pandey (2005). The rationing in the IPOs has been explained in Parlour, Rajan

(2005). The rational IPO waves have been detected in Pastror, Veronesi (2005). The research

problems on the entrepreneurial learning, the IPO decision, and the post-IPO drop in the firm

profitability have been described in Pastor, Taylor, Veronesi (2009). The question: Who benefits

from the IPO underpricing?, has been answered with the use of the evidences from the hybrid

book building offerings, in Pons-Sanz (2005). The global trends in the IPO methods have been

investigated, comparing the book building technique versus the auctions with the endogenous

entry technique, in Sherman (2005). The problem of the natural selection in the financial markets

has been researched Yan (2005). The question: Is the Dutch auction IPO a good idea?, has been

replied in Anand (2006). The underpricing and the aftermarket performance of the initial public

offerings in the case of Austria have been researched in Aussenegg (2006). The IPO pricing with

the book building and a when-issued market have been discussed in Aussenegg, Pichler, Stomper

(2006). The entrepreneur’s choice between the private ownership and the public ownership has

been selected for a discussion in Boot, Gopalan, Thakor (2006). The analysts’ selective coverage

and the subsequent performance of newly public firms have been discussed in Das, Guo, Zhang

(2006). The valuation issues have been discussed in Damodaran (2006). The IPO underpricing

and the after-market liquidity have been researched in Ellul, Pagano (2006). A survey of the

European IPO market has been conducted in Gajewski, Gresse (2006). The explanation of the

diversity in the shareholder lockup agreements has been given in Goergen, Renneboog,

Khurshed (2006). The new development of the Chinese capital market have been characterized

in Hong (2006). The question: Why do the IPO auctions fail?, has been replied in Jagannathan,

Sherman (2006). The strength of analyst coverage, following the IPOs, has been analyzed in

James, Karceski (2006). The earnings management and the long-run performance of the Spanish

initial public offerings have been documented in Pastor-Llorca, Poveda-Fuentes (2006). The

theory of corporate finance has been proposed in Tirole (2006).The IPO investment strategies

27

and the pseudo market timing have been researched in Trauten, Schulz (2006). The cycles in the

IPO market have been detected in Yung, Colak, Wang (2006). The information uncertainty and

the analyst forecast behavior have been investigated in Zhang (2006). The effects of “risk-factor”

disclosure on the pricing of the IPOs and the long run returns have been characterized in Arnold,

Fishe, North (2007). The simple FAQs about the Dutch auctions as well as the Google IPO have

been answered in Berkeley (2007). The currying favors to win the IPO mandates have been listed

in Derrien (2007). An event study approach to the short-sale constraints and the idiosyncratic

volatility puzzle has been revealed in Doran, Jiang, Peterson (2007, 2009). The differences in

the institutional and legal environments, which may explain the cross-country variations in the

IPO underpricing, have been discussed in Hopp, Dreherdo (2007). The blank check IPOs have

been considered in Jog, Sun (2007). The question: Why are the IPOs underpriced?, has been

answered, applying the evidences from Japan’s hybrid auction-method offerings, in Kerins,

Kutsuna, Smith (2007). The problems on the adverse selection, public information and

underpricing in the IPOs have been considered in Leite (2007). The research article by Paleari

deserve to be mentioned in view of the significant contribution to the understanding of the IPO

pricing. The over-optimism in the case of the IPOs pricing has been described in Paleari,

Vismara (2007). The going public decision making process, has been studied with the evidences

from the IPOs in Italy and in the UK in Paleari, Pellizzoni, Vismara (2008). The explanation on

the simultaneous consolidation and fragmentation of the Europe's stock markets has been given

in Paleari, Ritter, Vismara (2010). The financial statement analysis and the security valuation

have been studied in Penman (2007). The discussion: How do the underwriters value the IPOs?,

has been conducted with an empirical analysis of the French IPO market, in Thomas (2007). The

hot issue IPO markets and its consequences for the issuing firms and investors in the case of the

UK market in 2000 have been described in Toniato (2007). The IPO underpricing, firm quality,

and analyst forecasts have been discussed in Zheng, Stangeland (2007). The credit ratings and

IPO pricing problems have been researched in An, Chan (2008). The IPOs in the global capital

markets have been discussed in Casotti, Motta (2008). The network embeddedness,

specialization choices and performance in the investment banking industry have been in Farina

(2008). The question: Do the banks price their informational monopoly?, has been answered in

Hale, Santos (2008). The Google IPO has been described in Hild (2008). The problem: Do the

investors overweight the personal experience?, has been uncovered, using the evidence from the

IPO subscriptions, in Kaustia, Knupfer (2008). The subscription patterns, offer prices and the

underpricing of the IPOs have been discussed in Khurshed, Pande, Singh (2008). The grading,

transparent books and initial public offerings have been researched in Khurshed, Paleari, Pande,

28

Vismara (2011). The price of rapid exit in the venture capital-backed IPOs has been estimated in

Rossetto (2008). An international perspective on the motivations for the public equity offers has

been provided in Kim, Weisbach (2008). A globally unique concept on the grading of the initial

public offerings in the India’s capital markets has been formulated in Poudyal (2008). The

analysis into the IPO underpricing and clustering in the Hong Kong equity market has been done

in Yongyuan Qiao (2008). The cycles in the IPO market have been studied in Yung, Colak, Wang

(2008). The strategic waiting periods in the IPO markets has been identified in Colak, Gunay

(2011). The short-term timing of the initial public offerings has been researched in Bouis (2009).

The UK IPO underpricing and venture have been described in Coakley, Hadass, Wood (2009).

The question: How do the investment banks value the IPOs?, has been answered in Deloof, De

Maeseneire, Inghelbrecht (2009). An event study of the Shanghai stock exchange A-shares has

been conducted with the precise characterization of the impact on the IPO performance by the

reforming IPO allocation regulations in Jiang, Leger (2009). The shareholding by the venture

capitalists and patent applications of the Japanese firms in the pre- and post- IPO periods has

been described in Zhang (2009). The venture capital affiliation with the underwriters and the

underpricing of the initial public offerings in Japan have been researched in Arikawa,

Imad’eddine (2010). The question: Does the university affiliation reduces the uncertainty of the

IPOs?, has been answered in Bonardo, Paleari, Vismara (2010). The valuation of the university-

based firms, including the effects of academic affiliation on the IPO performance, has been

researched in Bonardo, Paleari, Vismara (2010). The role of the international markets in the

IPOs has been discussed in Caglio, Weiss-Hanley, Marietta-Westberg (2010). The IPO pricing

has been investigated in Cogliati, Paleari, Vismara (2010). The strategic IPOs and the product

market competition have been studied in Chod, Lyandres (2010). The information content of the

IPO grading has been researched in Deb, Marisetty (2010). The venture capital, ownership

structure, accounting standards and IPO underpricing have been studied, using the evidences

from Germany, in Elston, Yang (2010).The detection of the hot and cold cycles, using the

Markov regime switching model has been made, applying the evidences from the Chinese A-

share IPO market in Guo, Brooks, Shami (2010). The competitive effects of the IPOs have been

analyzed in Hsu, Reed, Rocholl (2010). The absorptive capacity and the post-acquisition inventor

productivity of the companies have been researched in Hussinger (2010, 2012). The question:

Why don't issuers choose the IPO auctions?, has been answered, considering the complexity of

indirect mechanisms, in Jagannathan, Jirnyi, Sherman (2010). An empirical analysis on the IPO

underpricing and the distance of company from the stock exchange has been completed in

Pennacchio, Del Monte, Acconcia (2010). The underpricing and the firms’ distance from the

29

financial centre, have been studied, using the evidences from the three European countries, in

Acconcia, Del Monte, Pennacchio (2011). The causal effect of the venture capital backing on the

underpricing of the Italian IPOs has been documented in Pennacchio (2013). The after-market

performance of the initial public offerings in the Indian IPO market in 2002 - 2006 has been

analyzed in Sahoo, Rajib (2010). The IPO market cycles in P. R. China, have been researched,

using the analysis on both the investor sentiment and the government’s market timing, in Shao,

Wu, Qin, Wang (2010). The results of the frequent IPO investments have been provided in Yao-

Min Chiang, Hirshleifer, Yiming Qian, Sherman (2010). The impact of the initial public offering

coalition on the deal completion has been evaluated in Boeh, Southam (2011). The IPOs with

and without the allocation discretion, have been researched, using the empirical evidences, in

Bubna, Prabhala (2011). The rise of the IPO activity around the World has been covered in

Doidge, Karolyi, Stulz (2011). The role by the private equity backing in the Italian IPOs,

including the subjects of the underpricing, wealth loss for the pre-existing shareholders and cost

of going public, has been researched in Ferretti, Meles (2011). The monetary policy and share

pricing business in Nigeria have been studied in Adesoye, Atanda (2012). The different analysts

reports on the orphan IPOs versus the non-orphan IPOs have been analyzed in Boissin (2012).

The success factors for taking the firms public with the SPACs have been discussed with

particular attention to the fast track IPO in Cumming, Hass, Schweizer (2012). A comparative

analysis of the SPACs and the IPOs has been made in Datar, Emm, Ince (2012). The application

of the mandatory IPO grading to improve the pricing efficiency has been described in Jacob

(2012). The question: What the all-cash companies tell us about the IPOs and the acquisitions?,

has been replied in Rodrigues, Stegemoller (2012). An analysis of returns from stocks with low

price/earnings ratio has been completed in the frames of the study on the initial public offering of

the stocks in Brazil in Saturnino, Saturnino, Lucena, Caetano, dos Santos (2012). The analysts’

forecast on the IPO firms during the global financial crisis has been discussed in Chang-Yi Hsu,

Jean Yu, Shiow-Ying Wen (2013). The IPO cycles in China’s A-share IPO market have been

detected, using the three regimes of the Markov switching model, in Zhiqiang Hu, Yizhu Wang

(2013). The institutional changes in the SPACs have been described in Lakicevic, Shachmurove,

Vulanovic (2013).

In this empirical research, we prefer to limit our research considerations by setting the

boundary conditions: The initial public offerings take place at the global stock exchanges in the

diffusion-type financial systems in the imperfect highly volatile global capital markets with the

induced nonlinearities. Since the time, when the first financial systems were established to

govern the money markets in Bagehot (1873, 1897), Fisher (1892), the diffusion theory has been

30

frequently applied to accurately characterize the diffusion - type financial systems in the finances.

The multiple evidences of the fact that the diffusion processes have the considerable influences

on the various econophysical and econometrical parameters of the diffusion-type financial

systems have been described in Bachelier (1900), Volterra (1906), Slutsky (1910, 1912, 1913,

1914, 1915, 1922a, b, 1923a, b c, 1925a, b, 1926, 1927a, b, 1929, 1935, 1937a, b, 1942),

Osborne (1959), Alexander (1961), Shiryaev (1961, 1963, 1964, 1965, 1967, 1978, 1998a, b,

2002, 2008a, b, 2010), Grigelionis, Shiryaev (1966), Graversen, Peskir, Shiryaev (2001),

Kallsen, Shiryaev (2001, 2002), Jacod, Shiryaev (2003), Peskir, Shiryaev (2006), Feinberg,

Shiryaev (2006), du Toit, Peskir, Shiryaev (2007), Eberlein, Papapantoleon, Shiryaev (2008,

2009), Shiryaev, Zryumov (2009), Shiryaev, Novikov (2009), Gapeev, Shiryaev (2010), Karatzas,

Shiryaev, Shkolnikov (2011), Shiryaev, Zhitlukhin (2012), Zhitlukhin, Shiryaev (2012), Feinberg,

Mandava, Shiryaev (2013), Akerlof, Stiglitz (1966), Rothschild, Stiglitz (1976), Stiglitz, Weiss

(1981), Richiardi, Gallegati, Greenwald, Stiglitz (2007), Jaffee, Russell (1976), Leland, Pyle

(1977), Bernanke (1979, 2002, 2004, 2007, 2009a, b, c, d, e, 2010a, b, 2012a, b, 2013a, b, c, d,

e, f, g, h, 2014), Bernanke, Blinder (1992), Bernanke, Gertler (1995), Bernanke, Reinhart

(2004), Bernanke, Reinhart, Sack (2004), Bernanke, Blanchard, Summers, Weber (2013), Shiller,

Pound (1989), Conley, Hansen, Luttmer, Scheinkman (1997), Stock, Watson (2002), Xiaohong

Chen, Hansen, Carrasco (2009), Ledenyov D O, Ledenyov V O (2013f, g, h, i).

The authors would like to make an additional comment that the diffusion theory in the

econophysics has been frequently complemented by the numerous important research discoveries

from the theoretical and experimental researches on the diffusion phenomena in the physics,

chemistry and mathematics in Abramenkov, Fogel’, Slyozov, Tanatarov, O. P. Ledenyov (2012),

Ledenyov V O, Ledenyov D O, Ledenyov O P (2012f), Ledenyov D O, Ledenyov V O (2012e).

Finally, let us say that this short condensed research article has been written, keeping in

the mind the following research topics discussion order:

1. The theories on the initial public offering of company equity at the stock

exchanges in the imperfect highly volatile global capital markets with the induced nonlinearities;

2. The valuation of the initial public offering of company equity at the stock

exchanges in the imperfect highly volatile global capital markets with the induced nonlinearities;

3. The underpricing of the initial public offering of company equity at the stock

exchanges in the imperfect highly volatile global capital markets with the induced nonlinearities;

4. The long term performance of the initial public offering of company equity at the

stock exchanges in the imperfect highly volatile global capital markets with the induced

nonlinearities;

31

5. The information absorption by the investors on the company equity value in time

of the initial public offering at the stock exchanges in the imperfect highly volatile global capital

markets with the induced nonlinearities.

Theories on initial public offering of company equity at stock exchanges in

imperfect highly volatile global capital markets with induced nonlinearities

Beginning the discussion on the initial public offerings, let us comment that, in Europe,

the first IPO was the public offering of the Vereenigde Oost-Indische Compagnie (Dutch East

India Company) in The Netherlands in 1602 in Joseph Penso de la Vega (1668, 1996), Wikipedia

(2014), Shiryaev (1998a). In the United States, the first IPO was the public offering of the Bank

of North America around 1783 in Wikipedia (2014). Let us continue the discussion on the

theories and practices on the initial public offering, explaining the main reasons for the IPOs.

Welch, Ritter (2002) write: “The first question must be "why do firms go public?" In most

cases, the primary answer is the desire to raise equity capital for the firm and to create a public

market in which the founders and other shareholders can convert some of their wealth into cash

at a future date. Nonfinancial reasons, such as increased publicity, play only a minor role for

most firms: absent cash considerations, most entrepreneurs would rather just run their firms than

concern themselves with the complex public market process. This still leaves the question of

why IPOs are the best way for entrepreneurs to raise capital, and why the motivation to do an

IPO is stronger in some situations or times (see Table 1) than in others. Stepping outside our

own sample, Gompers and Lerner (2001) report that there were fewer U.S. IPOs from 1935 -

1959 than the 683 in 1969 alone, and La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1997)

report wide differences in IPO activity across countries.”

Welch, Ritter (2002) distinguish the two big categories of theories on the going public

decisions: “1. Life cycle theories:

a) The first formal theory of the going public decision appeared in Zingales (1995). He

observed that it is much easier for a potential acquirer to spot a potential takeover target when it

is public. Moreover, entrepreneurs realize that acquirers can pressure targets on pricing

concessions more than they can pressure outside investors. By going public, entrepreneurs thus

help facilitate the acquisition of their company for a higher value than what they would get from

an outright sale. In contrast, Black and Gilson (1998) point out that entrepreneurs often regain

control from the venture capitalists in venture capital-backed companies at the IPO. Thus, many

IPOs are not so much exits for the entrepreneur as they are for the venture capitalists.

32

b) Chemmanur and Fulghieri (1999) develop the more conventional wisdom that IPOs

allow more dispersion of ownership, with its advantages and disadvantages. Pre-IPO “angel”

investors or venture capitalists hold undiversified portfolios, and therefore are not willing to pay

as high a price as diversified public-market investors. There are fixed costs associated with going

public, however, and proprietary information cannot be costlessly revealed—after all, small

investors cannot take a tour of the firm and its secret inventions. Thus, early in its life cycle a

firm will be private, but if it grows sufficiently large, it becomes optimal to go public.

c) Public trading per se has costs and benefits. Maksimovic and Pichler (2001) point out

that a high public price can attract product market competition. Public trading, however, can in

itself add value to the firm, as it may inspire more faith in the firm from other investors,

customers, creditors, and suppliers. Being the first in an industry to go public sometimes confers

a first-mover advantage. The quintessential company often cited as an example is Netscape.

However, Spyglass was a browser company that went public two months before Netscape---and

quickly faltered under Netscape’s competition. Schultz and Zaman (2001) report that many

internet firms that went public in the late 1990s pursued an aggressive acquisition strategy,

which they interpret as an attempt to pre-empt competitors.

2. Market-timing theories

a)Lucas and McDonald (1990) develop an asymmetric information model where firms

postpone their equity issue if they know they are currently undervalued. If a bear market places

too low a value on the firm, given the knowledge of entrepreneurs, then they will delay their

IPOs until a bull market offers more favorable pricing. In Choe, Masulis, and Nanda (1993),

firms avoid issuing in periods where few other good-quality firms issue. Other theories have

argued that markets provide valuable information to entrepreneurs (“information spillovers”),

who respond to increased growth opportunities signaled by higher prices (Subramanyam and

Titman (1999), Schultz (2000)).

b) We suggest that in addition to these rational theories for IPO volume fluctuations, a

plausible semi-rational theory without asymmetric information can also explain cycles in issuing

activity: entrepreneurs’ sense of enterprise value derives more from their internal perspective,

their day-to-day involvement with the underlying business fundamentals, and less so from the

public stock market. Sudden changes in the value of publicly traded firms are not as quickly

absorbed into the private sense of value held by entrepreneurs. Thus entrepreneurs adjust their

valuation with a lag. As a result, even if the market price is driven by irrational public sentiment

or the entrepreneur’s price is driven by irrational private sentiment, entrepreneurs are more

inclined to sell shares after valuations in the public markets have increased.”

33

Welch, Ritter (2002) note: “We interpret the evidence on the going public decision as

suggesting that firms go public in response to favorable market conditions, but only if they are

beyond a certain stage in their life cycle. Perhaps the most important unanswered question is

why issuing volume drops so precipitously following stock market drops. Although offer prices

are lowered, many firms withdraw their offering rather than proceed with their IPO. In other

words, why is there quantity adjustment, rather than price adjustment? This is a puzzle not only

for the IPO market, but for follow-on offerings as well.”

Tab. 1 shows a number of IPOs, first-day returns, gross proceeds, amount of money left

on the table, and long run performance by cohort year, 1980-2001 in Welch, Ritter (2002).

Tab. 1. Number of IPOs, first-day returns, gross proceeds, amount of money left on the table,

and long run performance by cohort year, 1980-2001 (after Welch, Ritter (2002)).

34

Roosenboom, van der Goot (2003) analyzed the IPOs on the Euronext Amsterdam in The

Netherlands: “We analyze a sample of 111 IPOs on Euronext Amsterdam during the years 1984-

1999.” Tab. 2 provides the summary statistics for 111 IPOs on the Euronext Amsterdam from

January 1984 to December 1999, and Fig. 1 shows the time distribution of IPOs in the

Netherlands in Roosenboom, van der Goot (2003).

Tab. 2. Summary statistics for 111 IPOs on Euronext Amsterdam from January 1984 to

December 1999 (after Roosenboom, van der Goot (2003)).

Fig. 1. Time distribution of IPOs in the Netherlands (after Roosenboom, van der Goot (2003)).

35

Let us continue with the research statements by Gajewski, Gresse (2006): “In recent

years, the market for initial public offerings (IPOs) in Europe has been characterized by several

important developments. Two major characteristics of this period are the outperformance of

‘new economy’ IPOs and the growth of book-building as the favourite choice among IPO

underwriting procedures. Another striking feature of the landscape of European IPOs is its

‘cyclicality’. In the late 90s, the growth of the internet bubble induced a large number of new

economy firms to go public, resulting in a hot issue market from 1998 to 2000. This IPO-

euphoria period was also characterized by high levels of initial returns, meaning that most IPO

companies “left money on the table”. Nevertheless, since 2000, with the substantial decline of

most New Markets, primary markets have become more apathetic than ever on most stock

exchanges. Finally, with the introduction of the Euro in twelve European countries, investors in

new listings tend to establish their financial strategies at a European level instead of clustering in

national markets.”

Tab. 3 shows the IPOs number of domestic firms per year and per country with the

investment funds excluded in Gajewski, Gresse (2006).

Tab. 3. IPOs: Number per year and per country domestic firms only - investment funds excluded

(after Gajewski, Gresse (2006)).

36

Tab. 4 shows the IPOs: New capital raised per year and per country - investment funds

excluded; Tab. 5 presents the data on the IPOs: End-of-year market value per year and per

country domestic firms only - investment funds excluded in Gajewski, Gresse (2006).

Tab. 4. IPOs: New capital raised per year and per country- investment funds excluded

(after Gajewski, Gresse (2006)).

Tab. 5. IPOs: End-of-year market value per year and per country domestic firms only-

investment funds excluded (after Gajewski, Gresse (2006)).

37

Gajewski, Gresse (2006) describe the current stock exchange listing process on the

European stock exchanges: “A request for a stock exchange listing must be made on the basis of

an introduction prospectus whose contents are subject to regulation and which is generally filed a

few months (120 days on average according to Schuster (2003)) before the admission date.

Typically, a universal or an investment bank, called ‘the underwriter’, is involved in developing

the admission statement and is in charge of the underwriting and floatation process. The

underwriter is chosen by the IPO candidate after a so-called ‘beauty contest’ at which banks or

other financial institutions present their proposals for the IPO. For most IPOs, the underwriter

assembles a banking syndicate, i.e. a combination of several banks or financial institutions. As

the ‘lead manager’, the underwriter is responsible for implementing the IPO while other

members of the syndicate only undertake underwriting or placement functions. The banks that

make up the syndicate are also selected through a ‘beauty contest’ in which individual banks

present their estimates of the firm’s value, the issue price, the demand for the issuer’s shares as

well as the costs of the issue. In order to compile the IPO prospectus, lawyers, together with the

underwriting bank, conduct due diligence, that is an examination of the company regarding its

legal, financial, and commercial aspects. The legal due diligence includes an examination of the

company’s major contracts, liabilities, patents and other legal facts. The commercial due

diligence contains an analysis of the issuing company’s fields of business, market positions,

development strategies, human resources, management, etc. Financial due diligence entails

financial statements, auditors’ reports for cases in which audited accounts are required,

investment planning, etc. While due diligence is exclusively for internal use, it serves as a basis

for the offering prospectus, which, at the minimum, contains information on the shares to be

admitted, general information about the issuer and associated companies, a description of the

issuer’s business activities, a presentation of the issuer’s net assets, financial position and results

of operations. The actual minimum content of the admission document and listing requirements

are usually defined by the regulatory body of the primary market and differ from country to

country (cf. I.2). The next step of the floatation process is to obtain the approval of the admission

authority, i.e. the market supervisor or the exchange itself or both. Lastly, the initial pricing and

placement of the shares are organized either by the underwriter or in co-ordination with the

exchange, depending on the institutional setting (cf. I.3).”

Gajewski, Gresse (2006) add: “Main markets are characterized by three common

requirements, specifically accounting records history, capital size and floating capitalisation.”

Tabs. 6a, b, c show the IPO listing requirements on the European regulated markets, and

Tab. 7 represents the IPO mechanisms by country in Gajewski, Gresse (2006).

38

Tab. 6a. Listing requirements on European regulated markets (after Gajewski, Gresse (2006)).

39

Tab. 6b. Listing requirements on European regulated markets (after Gajewski, Gresse (2006)).

40

Tab. 6c. Listing requirements on European regulated markets (after Gajewski, Gresse (2006)).

Tab. 7. IPO mechanisms by country (after Gajewski, Gresse (2006)).

41

Doidge, Karolyi, Stulz (2011) performed the research on the IPO and came up with the

following observation: “Global IPOs are a way for firms to exploit the better institutions of

foreign countries to have a successful or more profitable IPO.”

Tab. 8 shows the IPO activity in terms of IPO number for the top 25 countries around the

world: 1990 to 2007 in Doidge, Karolyi, Stulz (2011).

Tab. 8. IPO activity in terms of IPO number for the top 25 countries around the world:

1990 to 2007 (after Doidge, Karolyi, Stulz (2011)).

42

Tab. 9 shows the IPO activity in terms of IPO value for the top 25 countries around the

world: 1990 to 2007 in Doidge, Karolyi, Stulz (2011).

Tab. 9. IPO activity in terms of IPO value for the top 25 countries around the world:

1990 to 2007 (after Doidge, Karolyi, Stulz (2011)).

43

Fig. 2 shows the total IPO activity: 1990 to 2007 in Doidge, Karolyi, Stulz (2011).

Fig. 2. Total IPO activity: 1990 to 2007 (after Doidge, Karolyi, Stulz (2011)).

Let us add a few words about the online IPO by reviewing the various authors’ opinions

on the subject of research interest.

Bourjade (2003, 2008) writes: “More recently, Open IPO, a new, web-based underwriter

has proposed to sell shares using a uniform price auction. The extensive use of this mechanism is

due to the backing of leading economists and policy makers, who have asserted that uniform

price auctions are the most efficient multi-unit auction format. Their conclusions are based on

the generalization of the single-unit auctions literature to multi-unit auctions.” Bourjade (2003,

44

2008) describes the IPO valuation process: “After all bids are submitted, the seller and the

underwriter meet and set the offering price subject to the seller’s preferred ownership structure

which usually involves pro-rata rationing. They provide empirical evidence that secondary

market liquidity and ownership dispersion are fundamental in determining the offering price.”

Bourjade (2003, 2008) turns to the Open IPO statements to describe the factors, which may

impact the public offering price: “Depending on the outcome of negotiations between the

underwriters and us, the public offering price may be lower, but will not be higher, than the

clearing price. The bids received in the auction and the resulting clearing price are the principal

factors used to determine the public offering price of the stock that will be sold in this offering.

The public offering price may be lower than the clearing price depending on a number of

additional factors, including general market trends or conditions, the underwriters’ assessment

of our management, operating results, capital structure and business potential and the demand

and price of similar securities of comparable companies. The underwriters and us may also

agree to a public offering price that is lower than the clearing price in order to facilitate a wider

distribution of the stock to be sold in the offering.”

Lemmens (2004, 2007) explains: “The most important advantage of an IPO is first of all

the possibility to raise new capital (“primary offering”). This money can be used to finance the

growth of the existing activities or to diversify the activities (new investments or acquisitions).

An increase in capital reduces the proportion of the debts compared to the balance total, allowing

the firm to borrow more easily in the future and at a lower rate. Another advantage of an IPO is

that it facilitates the expansion process. When acquiring another company, the shareholders of

this company will prefer stock in your company instead of money. Such a transaction is therefore

more easily for a public company, as the value of this stock is known for all economic agents.

Other advantages of IPOs are the increased publicity (more attention from the press, better

image,…) and the possibility to award employees with options in order to motivate them.”

Lemmens (2004, 2007) writes: “The largest amounts of online capital raised in the future

will be done with IPOs. There are several advantages of online IPOs compared to traditional

IPOs: a reduction in costs, an increased availability of capital, a fair allocation of the shares

and more flexibility for investors. The disadvantages are parallel with online DPOs: less

marketing, possible lack of liquidity, problems of adverse selection, regulatory problems,

problems concerning the bidding strategy and possibly unrealistically high stock price. Of these

disadvantages, the lack of confidence of investors is the most important one. Investors will need

to learn to trust online investment bankers before the number of online IPOs starts growing

significantly.”

45

Tab. 10 shows the stock performance in an average US IPO, and Fig. 3 demonstrates the

performance of Google stock in the first week of trading in Hild (2008).

Tab. 10. Stock performance in average US IPO (after Hild (2008)).

Fig. 3. Performance of Google stock in first week of trading (after Hild (2008)).

46

The initial public offering of the company equity at the stock exchanges has been

researched in Fama, Fisher, Jensen, Roll (1969), Fama (1970, 1998), Fama, French (1992,

1993, 1996), Fama, Hansen, French (2013), Akerlof (1970), Stoll, Curley (1970), Logue (1973),

Logue, Rogalski, Seward, Foster-Johnson (2001), Reilly (1973), McDonald, Jacquillat (1974),

Ibbotson, Jaffe (1975), Ibbotson (1975), Ibbotson, Sindeler, Ritter (1988, 1994), Benston, Smith

(1976), Jensen, Meckling (1976), Jensen (1986), Miller (1977), Leland, Pyle (1977), Weinstein

(1978), Kahneman, Tversky (1979), Wilson (1979), Brown, Warner (1980), Buckland, Herbert,

Yeomans (1981), Milgrom (1981), Milgrom, Weber (1982), Myerson (1981), Baron (1982),

Dretske (1983), Myers, Majluf (1984), Ritter (1984, 1987, 1991, 1998a, b, 2002, 2003a, b,

2005), Beatty, Ritter (1986), Loughran, Ritter (1995, 2002), Hamao, Packer, Ritter (1998), Kim,

Ritter (1999), Chen, Ritter (2000), Ritter, Welch (2002), Ritter, Warr (2002), Kyle (1985),

Amihud, Mendelson (1986), Amihud, Mendelson, Uno (1999), Amihud, Hauser, Kirsh (2001,

2003), Beatty, Ritter (1986), Beatty, Zajac (1994), Beatty, Welch (1996), Booth J, Smith (1986),

Ridder (1986), Rock (1986), Shleifer, Vishny (1986), Shleifer, Wolfenzon (2002), Titman,

Trueman (1986), Bernheim, Peleg, Whinston (1987), McAfee, McMillan (1987), Miller, Reilly

(1987), Balvers, McDonald, Miller (1988), Johnson, Miller (1988), Tinic (1988), Allen,

Faulhaber (1989), Barry (1989), Barry, Muscarella, Peavy, Vetsuypens (1990), Benveniste,

Spindt (1989), Benveniste, Wilhelm (1990), Benveniste, Busaba, Wilhelm (1996), Benveniste,

Busaba (1997), Benveniste, Wilhelm (1997), Benveniste, Erdal, Wilhelm (1998), Benveniste,

Ljungqvist, Wilhelm, Yu (2003), Grinblatt, Hwang (1989), Koh, Walter (1989), Maskin, Riley

(1989), Muscarella, Vetsuypens (1989a, b, 1990), Uhlir (1989), Welch (1989, 1992, 1996),

Welch, Ritter (2002), Carter, Manaster (1990), Carter, Dark, Singh (1998), Clarkson, Thompson

(1990), Husson, Jacquillat (1990), Levis (1990), Lucas, McDonald (1990), Sahlman (1990),

Allen (1991), Hasbrouck (1991), Lee Ch M C, Shleifer, Thaler (1991), Megginson, Weiss (1991),

Megginson, Smart (2009), Menon, Williams (1991), Spatt, Srivastava (1991), Cotter (1992),

Hughes, Thakor (1992), Mauer, Senbet (1992), Aggarwal, Leal, Hernandez (1993), Aggarwal

(2000), Aggarwal, Conway (2000), Aggarwal, Prabhala, Puri (2002), Aggarwal, Krigman,

Womack (2002), Aggarwal (2003), Affleck-Graves, Hegde, Miller, Reilly (1993), Choe, Masulis,

Nanda (1993), Back, Zender (1993), Back, Zender (2001), Chemmanur (1993), Chemmanur,

Fulghieri (1997), Chemmanur, Fulghieri (1999), Chemmanur, Liu (2003), Chemmanur, Hu

(2007), Chemmanur, Yan (2009), Chemmanur, He, Hu (2009), Chemmanur, He, Nandy (2010),

Chemmanur, Krishnan (2012), Chemmanur, He (2012), Conrad, Kaul (1993), Dhatt, Kim, Lim

(1993), Drake, Vetsuypens (1993), Figlewski, Webb (1993), Hanley (1993), Hanley, Wilhelm

(1995), Hebner, Hiraki (1993), Jegadeesh, Weinstein, Titman (1993a), Jegadeesh, Weinstein,

47

Welch (1993b), Keloharju (1993), Keloharju, Kulp (1996), Keloharju, Nyborg, Rydqvist (2004),

Leleux (1993), Leleux, Muzyka (1997), Levis (1993), Levis (2004), Loughran (1993), Loughran,

Ritter, Rydqvist (1994), Loughran, Ritter (1995), Loughran, Ritter (1997), Loughran, Ritter

(2000), Loughran, Ritter (2002), Loughran, Ritter (2003), Loughran, Ritter (2004), Ruud (1993),

Rydqvist (1993), Rydqvist, Högholm (1995), Vos, Cheung (1993), Friedlan (1994), Jain, Kini

(1994), Jog, Srivastava (1994), Jog, McConomy (1999), Kunz, Aggarwal (1994), Lerner (1994),

Michaely, Shaw (1994), Michaely, Womack (1999), Schultz, Zaman (1994), Schultz (2003),

Degeorge (1995), Degeorge, Derrien, Womack (2005), Gerstein (1995), Gerstein (1996),

Gompers (1995), Gompers, Lerner (1997), Gompers, Lerner (2001), Gompers, Lerner (2003a),

Gompers, Lerner (2003b), Kim, Krinsky, Lee (1995), Spiess, Affleck-Graves (1995), Spiess,

Pettway (1997), Spiess, Affleck-Graves (1999), Spiess, Affleck-Graves (1999), Zingales (1995),

Barber, Lyon (1996a), Barber, Lyon (1996b), Barber, Lyon (1997), Barber, Odean (2008),

Booth J R, Chua (1996), Booth J R, Booth L (2003), Borggreve, Dobrikat (1996), Brealey, Myers

(1996), Brennan, Subrahmanyam (1996), Chowdhry, Sherman (1996), Chowdhry, Nanda (1996),

Easley, Kiefer, O’Hara, Paperman (1996), Hazen (1996), Houston, James (1996), Houston,

James, Karceski (2004), Kogut, Zander (1996), Kothari, Warner (1996), Kothari, Warner

(1997), Kothari (2001), Lee P J, Taylor, Walter (1996a), Lee P J, Taylor, Walter (1996b), Lee P

J, Taylor, Walter (1999), Nyborg, Sundaresan (1996), Pettway, Kaneko (1996), Périer (1996),

Aussenegg (1997), Brav, Gompers (1997), Brav (2000), Brav, Geczy, Gompers (2000), Brav,

Gompers (2002), Brav, Gompers (2003), Brennan, Franks (1997), Cai, Wei (1997), Carhart

(1997), Datta, Iskandar-Datta, Patel (1997), Dechow, Sloan (1997), Dechow, Hutton, Sloan

(1999), Dechow, Hutton, Sloan (2000), Ehrhardt (1997), Firth (1997), Gande, Puri, Saunders,

Walter (1997), Gande, Puri, Saunders (1999), Gregg (1997), Huang, Stoll (1997), Kooli (2000),

La Porta, Lopez-de-Silanes, Shleifer, Vishny (1997), La Porta, Lopez-de-Silanes, Shleifer,

Vishny (1998), La Porta, Lopez-de-Silanes, Shleifer (2002), La Porta, Lopez-de-Silanes, Shleifer

(2006), Lee I (1997), Ljungqvist (1997), Ljungqvist, Nanda, Singh (2001), Ljungqvist, Wilhelm

(2002), Ljungqvist, Wilhelm (2003), Ljungqvist, Jenkinson, Wilhelm (2003), Ljungqvist, Marston,

Wilhelm (2003), Ljungqvist, Nanda, Singh (2003), Ljungqvist, Nanda, Singh (2006), Ljungqvist

(2006), Mikkelson, Partch, Shah (1997), Nanda, Youngkeol Yun (1997), Page, Reyneke (1997),

Rajan, Servaes (1997a), Rajan, Servaes (1997b), Stehle (1997), Stehle, Ehrhardt (1999), Stehle,

Ehrhardt, Przyborowsky (2000), Steib, Mohan (1997), Su, Fleisher (1997), Arkebauer (1998),

Asquith, Jones, Kieschnick (1998), Ausubel, Cramton (1998a), Ausubel, Cramton (1998b),

Black, Gilson (1998), Daniel, Hirshleifer, Subrahmanyam (1998), Goergen (1998), Goergen,

Renneboog (2002), Helwege, Kleiman (1998), Helwege, Liang (2001), Helwege, Liang (2004),

48

Kahn, Winton (1998), Malvey, Archibald (1998), Mello, Parsons (1998), Mok, Hui (1998),

Pagano, Panetta, Zingales (1998), Pagano, Röell (1998), Paudyal, Saadouni, Briston (1998),

Poon, Firth, Fung (1998), Rangan (1998), Reese (1998), Sapusek (1998), Stoughton, Zechner

(1998), Taylor, Whittred (1998), Theoh, Welch, Wong (1998a), Theoh, Welch, Wong (1998b),

Ansotegui, Fabregat (1999), Arcas, Ruiz (1999), Baker, Gompers (1999), Baker, Wurgler

(2000), Baker, Gompers (2001), Baker, Nofsinger, Weaver (2002), Brown (1999), Cornelli,

Goldreich (1999), Cornelli, Goldreich (2001), Cornelli, Goldreich (2002), Cornelli, Goldreich

(2003), Cornelli, Goldreich, Ljungqvist (2006), Field (1999), Field, Hanka (2001), Field,

Sheehan (2001), Field, Karpoff (2002), Field, Sheehan (2002), Field, Lowry (2009), Kandel,

Sarig, Wohl (1999), Khurshed, Mudambi, Goergen (1999), Khurshed, Mudambi (2002),

Krigman, Shaw, Womack (1999), Krigman, Shaw, Womack (2001), Lyon, Barber, Tsai (1999),

Olson, Nelson (1999), Short, Keasey (1999), Stulz (1999), Stulz (2005), Stulz (2009),

Subramanyam, Titman (1999), Thomas, Zhang (1999), Arosio, Giudici, Paleari (2000), Arosio,

Giudici, Paleari (2001), Aussenegg (2000), Berkman, Bradbury, Ferguson (2000), Binmore,

Swierzbinski (2000), Boehmer, Fishe (2000), Boehmer, Fishe (2001), Boehmer, Fishe (2005),

Brailsford, Heaney, Powell, Shi (2000), Brailsford, Heaney, Shi (2004), Chen, Firth, Kim

(2000), D’Mello, Ferris (2000), Draho (2000), Dunbar (2000), Dunbar, Foerster (2008), Duque,

Almeida (2000), Eckbo, Masulis, Norli (2000), Eckbo, Norli (2001), Eckbo, Norli (2002), Eckbo,

Norli (2005), Eckbo (2008), Ellis, Michaely, O’Hara (2000), Ellis, Michaely, O’Hara (2002),

Fabrizio (2000), Foerster (2000), Gilbert, Klemperer (2000), Jain, Kini (2000), Kiymaz (2000),

Koskie, Michaely (2000), Lewis, Seward, Foster-Johnson (2000), Löffler (2000), Reuschenbach

(2000), Sapusek (2000), Schultz (2000), Schultz (2001), Schultz, Zaman (2001), Sinclair (2000),

Sherman (2000), Sherman (2001), Sherman, Titman (2002) Sherman (2003), Smart, Zutter

(2000), Stehle, Ehrhardt, Przyborowsky (2000), Westerholm (2000), Von Eije, de Witte, van der

Zwaan (2000), Bernardo, Welch (2001), Bradley, Jordan, Ha-Chin Yi, Roten (2001), Bradley,

Jordan (2002), Bradley, Jordan, Ritter (2003), Bradley, Jordan, Ritter (2008a), Bradley, Chan,

Kim, Singh (2008b), Busaba, Benveniste, Guo (2001), Certo, Covin, Daily, Dalton (2001), Chan,

Wang, Wei (2001), Cooney, Singh, Carter, Dark (2001), Daines, Klausner (2001), Danielsen,

Sorescu (2001), Degeorge, Derrien (2001a), Degeorge, Derrien (2001b), Derrien, Womack

(2002), Derrien (2005), Derrien, Kecskés (2006), Derrien (2007), DuCharme, Rajgopal, Sefcik

(2001), Francis, Hasan (2001), Gerke, Fleischer (2001), Habib, Ljungqvist (2001), Hahn, Ligon

(2004), Hansen (2001), Heaton (2001), Hoffmann-Burchardi (2001), Holmén, Högfeldt (2001),

Houge, Loughran, Suchanek, Yan (2001), Jakobsen, Sørensen (2001), Jenkinson, Ljungqvist

(2001), Jenkinson, Jones (2004), Jenkinson, Morrison, Wilhelm (2006), Jenkinson, Jones (2007),

49

Killian, Smith, Smith (2001), Lowry, Schwert (2001), Lowry, Schwert (2002), Lowry, Shu

(2002),Lowry (2003), Mager (2001), Maksimovic, Pichler (2001), Purnanandam, Swaminathan

(2001), Rehkugler, Schenek (2001), Schatt, Roy (2001), Schatt, Broye (2003), Sentis (2001),

Sentis (2002), Sentis (2004), Severin (2001), Stoughton, Wong, Zechner (2001), Torstila (2001),

Torstila (2003), Van Bommel, Vermaelen (2001), Van Frederikslust, Van der Geest (2001),

Vayanos (2001), Zhang (2004), Biais, Bossaerts, Rochet (2002), Biais, Faugeron-Crouzet

(2002), Blondell, Hoang, Powell, Shi (2002), Brau, Francis, Kohers (2002), Brounen, Eichholtz

(2002), Bulow, Klemperer (2002), Cheng, Mak, Chan (2002), Deloof, de Maeseneire,

Inghelbrecht (2002), Easton, Taylor, Shroff, Sougiannis (2002), Easton (2004), Easton (2006),

Easton, Sommers (2007), Faugeron-Crouzet, Ginglinger (2002), Filatotchev, Bishop (2002),

Fishe (2002), Gao, Mao, Zhong (2002), Giudici, Roosenboom (2002), Giudici, Roosenboom

(2005), Houge, Loughran, Suchanek, Xuemin Yan (2002), Kim, Kitsabunnarat, Nofsinger (2002),

Kiss, Stehle (2002), Kutsuna, Okamura, Cowling (2002), Logue, Rogalski, Seward, Foster-

Johnson (2002), Martimort (2002), Moerland (2002), Schiereck, Wagner (2002), Schuster

(2002), Schuster (2003), Wang, Zender (2002), Xie (2002), Baginski, Wahlen (2003), Barondes,

Nyce, Sanger (2003), Bartlett, Shulman (2003), Binay, Pirinsky (2003), Bourjade (2003, 2008),

Clarke, Dunbar, Kahle (2003), Derrien, Womack (2003), Doeswijk, Hemmes, Venekamp (2005),

Ellul, Pagano (2003), Goergen, Khurshed, McCahery, Renneboog (2003), Gounopoulos (2003),

Gulati, Higgins (2003), Higgins, Gulati (2003), Hoberg (2003), Hong, Kubik (2003),

Huyghebaert, Van Hulle (2003), Jelic, Briston (2003), Kaneko, Pettway (2003), Karolyi, Stulz

(2003), Kraus, Burghof (2003), Lemmens (2003, 2007), Lemmens (2004, 2007), Manigart, de

Maeseneire (2003), Neuhaus, Schremper (2003), Nounis (2003), Ofek, Richardson (2003),

Peristiani (2003), Pham, Kalev, Steen (2003), Roosenboom, Van der Goot (2003), Roosenboom,

Van der Goot, Mertens (2003), Roosenboom, Van der Goot (2005), Roosenboom (2007), Smart,

Zutter (2003), Van Bommel, Vermaelen (2003), Van der Goot (2003), Weber, Willenborg (2003),

Arugaslan, Cook, Kieschnick (2004), Bodnaruk, Kandel, Massa, Simonov (2004), Burrowes,

Jones (2004), Cassia, Giudici, Paleari, Redondi (2004), Cassia, Paleari, Vismara (2004),

Cassia, Vismara (2009), Chahine (2004a), Chahine (2004b), Chiang, Harikumar (2004), Cliff,

Denis (2004), Corwin, Harris, Lipson (2004), Durnev, Morck, Yeung (2004), Fernando,

Gatchev, Spindt (2004), Foerster (2004), Griffith (2004), Ganor (2004), Hahn, Ligon (2004),

Hao (2004), Hoberg (2004), Kooli, Suret (2004), Kremer, Nyborg (2004a), Kremer, Nyborg

(2004b), Kutsuma, Smith (2004), Lamont (2004), Lee M, Wahal (2004), Levy (2004), Lubig

(2004), Mayhew, Mihov (2004), Mayhew, Mihov (2005), Mira (2004), Peggy, Wahal (2004),

Pollock, Porac, Wade (2004), Pollock, Chen, Jackson, Hambrick (2005), Pritsker (2004),

50

Pritsker (2004, 2005), Pritsker (2006), Purnanandam, Swaminathan (2004), Rath, Tebroke,

Tietze (2004), Reuter (2004), Rice (2004), Rice (2006), Rindermann (2004), Sanders, Boivie

(2004), Schenone (2004), Serve (2004), Alti (2005, 2006), Alvarez, Gonzalez (2005), Benninga,

Helmantel, Sarig (20050, Berg, Neumann, Rietz (2005), Butler, Grullon, Weston (2005), Choo

(2005), Corwin, Schultz (2005), Dolvin (2005), Drobetz, Kammermann, Wälchli (2005),

Forestieri (2005), Hess (2005), Hurt (2005), Hurt (2006), Jagannathan, Gao (2005), Jain, Kini

(2005), Jaskiewicz, Gonzàlez, Menéndez, Schiereck (2005), Khanna, Noe, Sonti (2005), Khanna,

Noe, Sonti (2008), Li, McInish, Wongchoti (2005a), Li, Zheng, Melancon (2005b), LiCalzi,

Pavan (2005), Malloy (2005), Nounis (2005), Pandey (2005), Parlour, Rajan (2005), Pastror,

Veronesi (2005), Pastor, Taylor, Veronesi (2009), Pons-Sanz (2005), Sherman (2005), Yan

(2005), Anand (2006), Aussenegg (2006), Aussenegg, Pichler, Stomper (2006), Boot A W A,

Gopalan, Thakor (2006), Das, Guo, Zhang (2006), Damodaran (2006), Ellul, Pagano (2006),

Gajewski, Gresse (2006), Goergen, Renneboog, Khurshed (2006), Hong (2006), Jagannathan,

Sherman (2006), James, Karceski (2006), Pastor-Llorca, Poveda-Fuentes (2006), Tirole (2006),

Trauten, Schulz (2006), Yung, Colak, Wang (2006), Zhang (2006), Arnold, Fishe, North (2007),

Berkeley (2007), Doran, Jiang, Peterson (2007, 2009), Hopp, Dreherdo (2007), Jog, Sun (2007),

Kerins, Kutsuna, Smith (2007), Leite (2007), Paleari, Vismara (2007), Paleari, Pellizzoni,

Vismara (2008), Paleari, Ritter, Vismara (2010), Penman (2007), Thomas (2007), Toniato

(2007), Zheng, Stangeland (2007), An, Chan (2008), Casotti, Motta (2008), Farina (2008), Hale,

Santos (2008), Hild (2008), Kaustia, Knupfer (2008), Khurshed, Pande, Singh (2008), Khurshed,

Paleari, Pande, Vismara (2011), Rossetto (2008), Kim, Weisbach (2008), Poudyal (2008),

Yongyuan Qiao (2008), Yung, Colak, Wang (2008), Colak, Gunay (2011), Bouis (2009),

Coakley, Hadass, Wood (2009), Deloof, De Maeseneire, Inghelbrecht (2009), Jiang, Leger

(2009), Zhang (2009), Arikawa, Imad’eddine (2010), Bonardo, Paleari, Vismara (2010),

Bonardo, Paleari, Vismara (2010), Caglio, Weiss-Hanley, Marietta-Westberg (2010), Cogliati,

Paleari, Vismara (2010), Chod, Lyandres (2010), Deb, Marisetty (2010), Elston, Yang (2010),

Guo, Brooks, Shami (2010), Hsu, Reed, Rocholl (2010), Hussinger (2010), Hussinger (2012),

Jagannathan, Jirnyi, Sherman (2010), Pennacchio, Del Monte, Acconcia (2010), Acconcia, Del

Monte, Pennacchio (2011), Pennacchio (2013), Sahoo, Rajib (2010), Shao, Wu, Qin, Wang

(2010), Yao-Min Chiang, Hirshleifer, Yiming Qian, Sherman (2010), Adesoye, Atanda (2012),

Boissin (2012), Cumming, Hass, Schweizer (2012), Datar, Emm, Ince (2012), Jacob (2012),

Rodrigues, Stegemoller (2012), Saturnino, Saturnino, Lucena, Caetano, dos Santos (2012),

Chang-Yi Hsu, Jean Yu, Shiow-Ying Wen (2013), Zhiqiang Hu, Yizhu Wang (2013), Lakicevic,

Shachmurove, Vulanovic (2013), and by some other researchers.

51

Valuation of initial public offering of company equity at stock exchanges in

imperfect highly volatile global capital markets with induced nonlinearities

Cogliati, Paleari, Vismara (2010) performed the original research on the valuation of the

IPOs: “There exist two approaches to firm valuation. In direct valuation, the firm’s value is

estimated from its fundamentals; in relative valuation, it is estimated from the prices of

comparable firms. In both approaches, the valuation faces specific difficulties related to the IPO

timing decision. For example, firms may schedule their IPO in order to take advantage of

“windows of opportunity”. These are periods of market buoyancy during which other companies

in the same industry tend to be overvalued Loughran and Ritter (1995). Thus, investors risk

over-paying for stock in firms priced using relative valuation methodologies. Besides, firms may

decide to go public when they are able to display positive growth opportunities, and thus induce

optimistic valuations. To do this, firms may time their IPO for when transitory earnings are high,

since investors have difficulty distinguishing between transitory and permanent earnings (this is

the signal-jamming explanation given by Stein (1989)). Finally, managers may window-dress

accounting numbers to make their firms look better Teoh et al. (1998). Again, investors risk

over-valuation of such firms.”

Cogliati, Paleari, Vismara (2010) state: “We find that the Discounted Cash Flow (DCF)

is the model of direct valuation that is most widely used to price IPOs. Specifically, we

investigate a sample of 184 IPOs priced using a DCF model to address a basic research question:

at what rates were the IPO firms expected to grow by their underwriters?”

Cogliati, Paleari, Vismara (2010) propose an equation to value the IPO with the DCF

model:

Cogliati, Paleari, Vismara (2010) suggest an equation to estimate the expected growth

rates, implied in IPO prices:

1 1 2

1 1

1 1 1

1 1 1

i T iT

IPO IPO

i i

g g gEV FCFF

WACC WACC WACC

∞

= =

+ + + = + + + + ∑ ∑

( ) ( ) ( ) ( )( )

1

1 2 11 1 1 1 1

1

T T

IPO IPOIPO T

pre pre

g WACC g gFCFF DP

WACC NSH NSHWACC

− + + − + + + = − +

52

Cogliati, Paleari, Vismara (2010) make a remark: “Estimation errors (i.e., the difference

between implied and realized growth) increase with IPO firms’ leverage, pre-IPO earnings, and

underpricing, while decrease with age, size, and book-to-market ratios.”

Tab. 11 shows the notation and definition of the variables in Cogliati, Paleari, Vismara

(2010).

Tab. 11. Notation and definition of variables (after Cogliati, Paleari, Vismara (2010)).

53

The valuation of the initial public offering of the company equity at the stock exchanges

has been researched in Logue (1973), McDonald, Jacquillat (1974), Kim, Ritter (1999), Ritter,

Welch (2002), Amihud, Mendelson (1986), Titman, Trueman (1986), Koh, Walter (1989), Welch

(1989, 1992, 1996, 2002), Cotter (1992), Mauer, Senbet (1992), Chemmanur (1993), Michaely,

Shaw (1994), Chowdhry, Nanda (1996), Datta, Iskandar-Datta, Patel (1997), Ljungqvist (1997),

Ljungqvist, Nanda, Singh (2001), Ljungqvist, Wilhelm (2003), Ljungqvist, Nanda, Singh (2003,

2006), Nanda, Youngkeol Yun (1997), Poon, Firth, Fung (1998), Aggarwal, Conway (2000),

Kooli (2000), Lowry, Schwert (2001), Deloof, de Maeseneire, Inghelbrecht (2002), Fishe (2002),

Giudici, Roosenboom (2002), La Porta, Lopez-de-Silanes, Shleifer (2002), Sanders, Boivie

(2004), Cassia, Paleari, Vismara (2004), Cassia, Vismara (2009), Sanders, Boivie (2004),

Corwin, Schultz (2005), Derrien (2005), Roosenboom, van der Goot (2005), Aussenegg, Pichler,

Stomper (2006), Damodaran (2006), Gajewski, Gresse (2006), Paleari, Vismara (2007),

Penman (2007), Roosenboom (2007), Thomas (2007), An, Chan (2008), Khurshed, Pande, Singh

(2008), Rossetto (2008), Deloof, De Maeseneire, Inghelbrecht (2009), Jiang, Leger (2009),

Bonardo, Paleari, Vismara (2010), Cogliati, Paleari, Vismara (2010), Adesoye, Atanda (2012),

Jacob (2012), and by some other authors.

Underpricing of initial public offering of company equity at stock exchanges

in imperfect highly volatile global capital markets with induced

nonlinearities

Hopp, Dreherdo (2007) define the underpricing of company’s equity as: “Underpricing

relates to the fact that shares traded publicly for the first time substantially jump in price on the

first trading day. Thus, investors are willing to pay higher prices for shares when trading begins

than investors paid for their share allocation from the investment bank that accompanied the

prospective IPO. As substantial amounts of money are left on the table when personal shares are

sold too low and the prices for retained shares are diluted, underpricing is costly to firm owners

(Ljungqvist (2006)). The academic literature points out several reasons for the prevailing

existence of underpricing in capital markets. According to Ljungqvist (2006), IPO underpricing

can in general be attributed to asymmetric information, institutional factors, control

considerations and behavioral aspects. Ritter (1984) argues that underpricing is related to the ex

ante uncertainty about the future value of a firm going public. Hence, the level of underpricing

can be regarded as a compensation for the risk bearing of investors.”

Tab. 12 shows the variations of IPOs and IPO underpricing in Hopp, Dreherdo (2007).

54

Tab. 12. Cross country variation of IPOs and IPO underpricing (after Hopp, Dreherdo (2007)).

Gajewski, Gresse (2006) write: “Initial underpricing is positively linked to information

asymmetry in the after-market. It produces higher turnover immediately after the IPO but has no

effect on trading volumes after the first year of trading, so that this liquidity effect cannot be put

down to the ownership structure but is more likely attributable to the interest underpriced stocks

generate.” Gajewski, Gresse (2006) explain: “Initial performance can be measured by the

difference between the post-listing equilibrium price (EP) and the final offering price (OP)

divided by the offering price:

A main problem is the choice of the equilibrium price EP, i.e. the trading price matching

the offer and the demand for the shares after the IPO. When the market is sufficiently liquid, EP

generally corresponds to the first-day closing price. In other cases, the equilibrium may be

obtained a couple of days after the IPO. For that reasons, some authors measure initial returns

1,

ln .

EP OP EPU

OP OP

EPU

OP

−= = −

=

55

over a five day or one week horizon (Table 9). The raw initial return U can be considered a

measure of underpricing, assuming that the normal return under efficiency would be 0 and that

the equity risk is equivalent to the market risk. Other methods relax these assumptions and adjust

raw returns.”

Gajewski, Gresse (2006) note: “Three adjustment methods are used in the literature:

1) The initial return adjusted for a market index return

where I1 is the market index closing price on the first trading day, and I0 is the index

closing value the day before;

2) The initial return adjusted for systematic risk,

where β is the systematic risk;

3) The raw initial return adjusted for the return of a control portfolio Ritter (1991) and

Affleck-Graves et al. (1993)

where Rp is the return of a reference portfolio.

Moreover, some papers Keloharju (1993); Husson and Jacquillat (1990) calculate the

return that would be obtained by an uninformed investor participating in all the IPOs.

Considering that the market movements are too small to affect the initial returns significantly,

most studies measure IPO underpricing with raw returns and select the closing price at the end of

the first day of quotation as the equilibrium price. Adjusted returns are preferred when the delay

between the IPO date and the determination of the first equilibrium price is too long Périer

(1996). The most widely utilized adjusted measure is Um, which implicitly standardizes

systematic risk to 1. As pointed out by Kooli (2000), the limits of the second model (Us) lie in

the difficult and biased estimation of beta.”

1 0 1

0 0

1

0

,

ln ln ,

m

m

EP OP I I EP IU

OP I OP I

EP IU

OP I

− −= − = −

= −

1 0

0

,S

EP OP I IU

OP I

− −= − β

,P P

EP OPU R

OP

−= −

56

Toniato (2007) explains: “The initial post-IPO abnormal returns will be computed as in

Aggarwal et al. (1993). For this purpose firstly, the total return on each of the studied

companies’ stock (Rst) and on their benchmarks (Rbt) are estimated for the period from the offer

price until the tth day of trading as

where Pst and Pbt are the closing market price of each of the companies’ stock and of the

benchmarks on the tth day of trading. Ps0 and Pb0 are the offer price at which the company’s

shares floated in the market and the opening market price of the benchmark on the day of the

IPO respectively. From these two returns the market adjusted abnormal return from the opening

price until the end of the tth day of trading is computed, for all clinical study companies, as

Khurshed and Mudambi (2002) draw attention to the fact that the use of MAAR as an

abnormal return measure assumes that the systematic risk of the IPO company is the same as that

of the benchmark. Therefore, upward-biased MAARs might be generated when the assumption is

not satisfied. Nonetheless, Khurshed and Mudambi (2002) also indicate that this matter is

unlikely to affect the essence of the performance results.”

The underpricing variable in the IPO process has also been defined in Pennacchio (2013)

where P is the closing price in the first day of trading, and PIPO is the offer price of the stocks.

Ritter (2006) defines the underpricing and the money on the table as:

100,IPO

IPO

P PUnderpricing

P

−=

0

0

1,

1,

t

t

t

t

S

S

S

b

b

b

PR

P

PR

P

= −

= −

( )( )1

100 1 .1

t

t

t

RsMAAR

Rb

+ = − +

.Money on the table=number of shares sold(closing price-offer price)

100% (Underpricing closing price-offer price)/offer price,=

57

Loughran, Ritter (2004) write: “The reasons that IPOs are underpriced vary, depending

on the environment. In the 1980s, it is conceivable that the winner’s curse problem and dynamic

information acquisition were the main explanations for underpricing that averaged 7% in the US.

During the internet bubble, we think that these were not the main reasons for underpricing.

Instead, analyst coverage and side payments to CEOs and venture capitalists became of

significant importance.”

Discussing the analyst coverage problem, Loughran, Ritter (2004) continue to explain:

“Underwriters, as intermediaries, advise the issuer on pricing the issue, both at the time of

issuing a preliminary prospectus that includes a file price range, and at the pricing meeting when

the final offer price is set. If underwriters receive compensation from both the issuer (the gross

spread) and investors, they have an incentive to recommend a lower offer price than if the

compensation was merely the gross spread.” The analyst coverage problem has been found to

exist in Boissin (2012): “We find that investors and market participants pay attention to analyst

coverage when IPOs have large underwriting syndicates and are highly underpriced.”

Considering the CEOs and venture capitalists side payments problem, Loughran, Ritter

(2004) propose a spinning hypothesis of IPO underpricing: “We introduce a new agency

explanation for IPO underpricing, the spinning hypothesis, which is based on a conflict of

interest between decision-makers and other pre-IPO shareholders. It posits that decision-makers

are willing to hire underwriters with a history of underpricing because the decision-makers

receive side payments. The decision-makers are the individuals who choose the managing

underwriters, especially the lead underwriter, for an IPO. These decision-makers are the general

partners of the lead venture capital firm (if a firm is financed with venture capital money) and the

top managers of the issuing firm. The other pre-issue shareholders are the limited partners of

venture capital firms and other minority shareholders.”

Fig. 4 demonstrates the number of IPOs (bars) and average first-day returns (diamonds)

by calendar year in Loughran, Ritter (2004).

Fig. 5 depicts the average first-day returns by age of the firm at the time of IPO in

Loughran, Ritter (2004).

Tab. 13 provides some information on a number of IPOs, first day returns, number of

managing underwriters, amount of money left on the table, valuation levels, and sales by year

(means) in Loughran, Ritter (2004).

Tab. 14 shows the average first-day returns on the IPOs categorized by proceeds, assets,

sales, age, industry, VC-backing, share overhang, and underwriter prestige in Loughran, Ritter

(2004).

58

Fig. 4. Number of IPOs (bars) and average first-day returns (diamonds) by calendar year

(after Loughran, Ritter (2004)).

Fig. 5. Average first-day returns by age of firm at time of IPO (after Loughran, Ritter (2004)).

59

Tab. 13. Number of IPOs, first day returns, number of managing underwriters, amount of money

left on the table, valuation levels, and sales by year (means) (after Loughran, Ritter (2004)).

Tab. 14. Average first-day returns on IPOs categorized by proceeds, assets, sales, age, industry,

VC-backing, share overhang, and underwriter prestige (after Loughran, Ritter (2004)).

60

Tab. 15 shows the pre-issue CEO ownership in dollar values and percentage, 1996-2000;

and Tab. 16 highlights the mean and median first-day returns, median age, sales, EPS, and share

overhang, and industry representation vs the underwriter prestige in Loughran, Ritter (2004).

Tab. 15. Pre-issue CEO ownership in dollar values and percentage, 1996-2000

(after Loughran, Ritter (2004)).

Tab. 16. Mean and median first-day returns, median age, sales, EPS, and share overhang, and

industry representation categorized by underwriter prestige (after Loughran, Ritter (2004)).

Toniato (2007) stated that the IPO underpricing was documented in Stoll, Curley (1970)

for the first time: “Stoll and Curley (1970) were the pioneers in documenting the systematically

abnormal first-day returns of IPOs. In the following years the same phenomenon was observed

in the UK Buckland, Herbert and Yeomans (1981) and later in virtually every capital market in

world. Furthermore, contrary to the idea that the market would learn and rectify this anomaly

with time, Ritter and Welch (2002) document a significant trend of increase in this pattern of

underpricing over time.”

61

The existing underpricing theories are discussed below in details in Toniato (2007):

“1) Some researchers explain IPO underpricing by proposing it is a signalling

mechanism. This theory is based on an asymmetry of information between issuers and investors;

which generates a lemons problem since only low quality issuers will be willing to sell their

shares at the average price. The model, therefore, predicts that high quality issuers will signal

their superiority by selling shares at a price lower than the market believes they are worth. These

high quality issuers are believed to be compensated for their sacrifice in the future when “a

higher price at the seasoned offering eventually compensates firms for the intentionally low IPO

price” Welch (1989). However, further research contested this theory and found no evidence of

underpriced IPOs consistently returning to the market for seasoned offerings Michaely, Shaw

(1994).

2) Another theory based on asymmetry of information and one of the most compelling

models in explaining IPO performance is the one created by Rock (1986). The model applies the

concept of a winner’s curse to the IPO market. According to this theory, investors can be

classified as ‘informed’ or ‘uniformed’. The former are investors who are willing to incur the

costs to assess the future performance of new issues and the latter are investors who do not spend

resources on the analysis of IPOs and indiscriminately invest in all new issues. Since informed

investors will only apply for underpriced IPOs and uninformed investors apply to all;

underpriced issues will be oversubscribed while the overpriced issues will be relatively

undersubscribed. Consequently, the investor who applies for all new issues finds himself in the

long run holding a much larger amount of overpriced IPOs. Hence, if all IPOs are priced at the

underlying value, uninformed investors make systematic losses and leave the market. Rock’s

model, therefore, anticipates that underwriters will systematically underprice all issues fearing

that otherwise the uninformed investor might leave the IPO market ensuing shorter liquidity and

a decrease in profitability for investment banks. The model found support in empirical studies

including Keloharju (1993), Koh and Walter (1989) and recently in the UK Khurshed and

Mudambi (2002) who find no significant underpricing in investment trusts IPOs and conclude

that this partially due to the smaller differential of information between uninformed and

informed investors about this type of firm.

3) Baron (1982) offers an explanation which focuses on the asymmetry of information not

between investors and underwriters but between issuing firms and underwriters. The model

assumes that investment bankers have more information about the demand for IPO shares in the

market and therefore the issuer could only monitor the work of the underwriter for a cost. This

makes it optimal for the issuer to allow a certain degree of underpricing. This model found some

62

empirical support in the work of Khurshed and Mudambi (2002). However, Muscarella and

Vetsuypens (1989) found that when investment banks themselves go public the underpricing is as

large as on other types of firms, casting doubt on the validity of the theory.

4) Models which do not rely on the asymmetry of information include the theory that

investment bankers possess a monopsony power over small issuing firms, which can be used to

lower the risk of losses for investment banks. This model also infers that underwriters can use

this power to distribute underpriced IPOs to favoured clients. In tune with this prediction

Cornelli and Goldreich (2001) in the UK and Aggarwal, Prabhala and Puri (2002) in the US

conclude that underwriters favor institutional investors on the allocation of shares. However,

other recent research contested this idea and found that “underpricing has little or no effect on

outside block ownership” Field and Sheehan (2002).

5) Finally, Tinic (1988) provides a further model not dependent on the asymmetry of

information. The author develops a litigation theory which predicts that issuers and underwriters

use underpricing as form of insurance against legal action. The model assumes an implied

agreement between all parts involved in an IPO, where investors are rewarded with excess

returns in the short run in exchange for neglecting small errors related to disclosure requirement

for issuing firms. Drake and Vetsuypens (1993) challenged the model finding that on average

sued IPOs actually had higher underpricing than those not sued.

Tab. 17 presents an international evidence of short-run underpricing in Toniato (2007).

Tab. 17. International evidence of short-run underpricing (after Toniato (2007)).

63

Toniato (2007) “Theoretical models explaining the long run behaviour of IPOs are less

plentiful than the ones relating to the short run behaviour. Khurshed, Mudambi and Goergen

(1999) separates these theories in three groups:

1) one which provides behaviour and expectations-based explanations for the

phenomenon,

2) one which bases its explanations in the agency theory, and

3) a final group which deem the observed underperformance a result of mis-

measurement.”

Tab. 18 presents an international evidence of the long-run performance of IPOs in

Toniato (2007).

Tab. 18. International evidence of long-run performance of IPOs (after Toniato (2007)).

Yongyuan Qiao (2008) researched both the time series properties of the level of IPO

shares underpricing and the volume of IPO shares selling in Hong Kong equity market from

November, 1999 to the end of 2005.

Fig. 6 shows a total number of IPOs at Hong Kong Stock Exchange; Fig. 7 demonstrates

an average IPO capitalization at Hong Kong Stock Exchange; Fig. 8 provides some information

on an average IPO underpricing levels across the countries in Yongyuan Qiao (2008).

64

Fig. 6. Number of IPOs at Hong Kong Stock Exchange (after Yongyuan Qiao (2008)).

Fig. 7. Average IPO capitalization at Hong Kong Stock Exchange (after Yongyuan Qiao (2008)).

Fig. 8. Average IPO underpricing levels across countries (after Yongyuan Qiao (2008)).

65

Pennacchio, Del Monte, Acconcia (2010) suggested that the original hypothesis that the

distance of a firm from the main financial centre affects underpricing positively: The higher is

the distance; the higher are the information imperfections among players involved in the Initial

Public Offering and the higher is the uncertainty about the true value of the listing firm. This

research proposal is in an agreement with the theoretical approach that explains the underpricing

in the context of the asymmetric information flows theory.

Tab. 19 shows the determinants of underpricing in Italy, France and Germany (1999 -

2009) in Pennacchio, Del Monte, Acconcia (2010).

Tab. 19. Determinants of underpricing in Italy, France and Germany (1999-2009)

(after Pennacchio, Del Monte, Acconcia (2010)).

66

Pennacchio (2013) proposes that: “The underpricing difference is actually due to the

causal effect of venture capital backing and that the raw comparison of the sample means

underestimates such an effect. The result is consistent with the certification hypothesis, that is,

certifying that the value of issuing firms reflects all relevant inside information, venture capital

backing reduces the asymmetric information problem that arises in the IPO process.”

Tab. 20 shows the Italian IPOs by year of listing, and Tab. 21 demonstrates the

characteristics of the VC backed and non-VC backed IPOs in Pennacchio (2013).

Tab. 20. Italian IPOs by year of listing after Pennacchio (2013)).

Tab. 21. Characteristics of VC backed and non-VC backed IPOs (after Pennacchio (2013)).

67

Pennacchio (2013) writes: “The provided empirical evidence indicates that venture

capital backing play an important role in the reduction of information asymmetries between

issuing firms and outside investors, and consequently of the IPO underpricing. Given that the

underpricing is considered as the main indirect cost of floatation, the result suggests that an

efficient venture capital industry may help to overcome the so called “funding gap” – the

financing problems faced by new and small firms – with wide advantages for the overall

economy.”

Tab. 22 presents the regression analysis: The effect of venture capital backing on the IPO

underpricing in Pennacchio (2013).

Tab. 22. Regression analysis: the effect of venture capital backing on the IPO underpricing

(after Pennacchio (2013)).

68

Pennacchio, Del Monte, Acconcia (2010) note: “IPO process involves both direct costs

(underwriting and audit fees, selling commission, legal expenses, etc.) and indirect costs.

Underpricing is considered the larger indirect cost.”

Pritsker (2004, 2006) proposed a fully-rational liquidity-based theory of IPO

underpricing and underperformance: “In the model, underwriters need to sell a fixed number of

shares at the IPO or in the aftermarket. To maximize revenue and avoid selling into the

aftermarket where they can be exploited by large investors, underwriters distort share allocations

towards investors with market power, and set the IPO offer price below the aftermarket trading

price. Large investors who receive IPO share allocations sell them slowly afterwards to reduce

their trade’s price-impact. This curtails the shares that are available to small price-taking

investors, causing them to bid up prices and bid down returns. In some simulations, the distorted

share allocations and slow unwinding behavior generate post-IPO return underperformance that

persists for several years.”

Zhang J X (2009) makes an interesting remark that the level of underpricing reduces

in the case of the decrease of the degree of information asymmetry about the firm at the time

of the IPO: “The information about the firm is disclosed so as to inform investors about the

firm's value at the time of the IPO. Correct information about the quality of innovation of a

firm at the time of the IPO can exhibit important information about its attainment in the IPO

market. Therefore, if credible information on the value of a firm is provided at the time of the

IPO, information asymmetry and the underpricing of the firms will be reduced Rock (1986).

At the time of the IPO, information asymmetry as to the firm's value will decrease with the

disclosure of accurate information about the value of the firm's innovation stock. This

decrease in information asymmetry will be associated with an identical decrease in the

underpricing of market valuations.”

The underpricing of the initial public offering of the company equity at the stock

exchanges has been researched in Beatty, Ritter (1986), Rock (1986), Balvers, McDonald, Miller

(1988), Johnson, Miller (1988), Allen, Faulhaber (1989), Barry (1989), Muscarella, Vetsuypens

(1989a, b), Muscarella, Vetsuypens (1990), Uhlir (1989), Levis (1990), Hughes, Thakor (1992),

Aggarwal, Krigman, Womack (2002), Affleck-Graves, Hegde, Miller, Reilly (1993), Dhatt, Kim,

Lim (1993), Drake, Vetsuypens (1993), Hanley (1993), Leleux (1993), Leleux, Muzyka (1997),

Loughran (1993), Loughran, Ritter (1995), Loughran, Ritter (2003, 2004), Ruud (1993),

Rydqvist (1993), Vos, Cheung (1993), Jog, Srivastava (1994), Jog, McConomy (1999), Kunz,

Aggarwal (1994), Schultz, Zaman (1994), Degeorge (1995), Gerstein (1995, 1996), Booth, Chua

(1996), Lee, Taylor, Walter (1996), Pettway, Kaneko (1996), Aussenegg (1997), Brennan,

69

Franks (1997), Page, Reyneke (1997), Rydqvist (1997), Spiess, Pettway (1997), Asquith, Jones,

Kieschnick (1998), Mok, Hui (1998), Reese (1998), Theoh, Welch, Wong (1998a), Lee, Taylor,

Walter (1999), Arosio, Giudici, Paleari (2000), Brav, Geczy, Gompers (2000), Kiymaz (2000),

Smart, Zutter (2000), Chan, Wang, Wei (2001), DuCharme, Rajgopal, Sefcik (2001), Francis,

Hasan (2001), Field, Sheehan (2001), Field, Sheehan (2002), Habib, Ljungqvist (2001), Hahn,

Ligon (2004), Hoffmann-Burchardi (2001), Purnanandam, Swaminathan (2001), Rehkugler,

Schenek (2001), Van Frederikslust, Van der Geest (2001), Bradley, Jordan (2002), Cheng, Mak,

Chan (2002), Derrien, Womack (2002), Filatotchev, Bishop (2002), Kiss, Stehle (2002),

Khurshed, Mudambi (2002), Lowry, Shu (2002), Schiereck, Wagner (2002), Sherman, Titman

(2002), Derrien, Womack (2003), Ellul, Pagano (2003), Goergen, Khurshed, McCahery,

Renneboog (2003), Gounopoulos (2003), Manigart, de Maeseneire (2003), Pham, Kalev, Steen

(2003), Smart, Zutter (2003), Arugaslan, Cook, Kieschnick (2004), Cassia, Giudici, Paleari,

Redondi (2004), Chahine (2004b), Chiang, Harikumar (2004), Cliff, Denis (2004), Griffith

(2004), Hahn, Ligon (2004), Houston, James, Karceski (2004), Keloharju, Nyborg, Rydqvist

(2004), Kremer, Nyborg (2004b), Lee, Wahal (2004), Lubig (2004), Peggy, Wahal (2004),

Pritsker (2004, 2005, 2006), Purnanandam, Swaminathan (2004), Jagannathan, Gao (2005), Li,

Zheng, Melancon (2005b), Nounis (2005), Pandey (2005), Pons-Sanz (2005), Aussenegg (2006),

Ellul, Pagano (2006), Gajewski, Gresse (2006), Ljungqvist (2006), Hopp, Dreherdo (2007),

Kerins, Kutsuna, Smith (2007), Leite (2007), Zheng, Stangeland (2007), Khurshed, Pande, Singh

(2008), Yongyuan Qiao (2008), Coakley, Hadass, Wood (2009), Arikawa, Imad’eddine (2010),

Elston, Yang (2010), Pennacchio, Del Monte, Acconcia (2010), Acconcia, Del Monte,

Pennacchio (2011), Pennacchio (2013), Ferretti, Meles (2011), and by some other authors.

Long term performance of initial public offering of company equity at stock

exchanges in imperfect highly volatile global capital markets with induced

nonlinearities

Von Eije, de Witte, van der Zwaan (2000) study the long term- performance of IPOs in

the Netherlands: “The shareholders that stay with the company after the IPO and the new

shareholders, however, do not necessarily profit from the listing. Much empirical literature on

initial public offerings (IPOs) that addresses the long-term performance of IPOs suggests that

these stockholders may not profit from the IPO because the IPO companies show

underperformance.” Von Eije, de Witte, van der Zwaan (2000) present a short review on the

origins of IPO underperformance: “Several explanations arise for this anomalous phenomenon.

70

Ritter [1991, 1997] suggests various reasons for underperformance. Issuer's timing, risk

mismeasurement, fads as well as the fact that mainly optimistic investors will be prepared to buy

overpriced new IPO stock may all contribute to long term underperformance. Welch [1989,

1996] proposes that low quality (underperforming) companies cannot mimic the signals of high

quality companies of which the owners issue IPO-shares at a discount and then wait patiently

before selling the remainder of the firm in a seasoned equity offering. Hughes and Thakor

[1992] suggest that long-term underperformance originates from potential legal liabilities of

misrepresenting the quality of the IPO-shares. Carter, Dark and Singh [1998] attribute lower

performance to lower underwriter’s quality. Teoh, Welch and Wong [1998], finally, explain

underperformance from window dressing before the company goes public.” Von Eije, de Witte,

van der Zwaan (2000) highlight the idea that IPO can induce the certain changes within the

company: "In this article we present the results of a survey on IPO-related organizational change

amongst 27 corporate officers of companies that received a listing at the Amsterdam Stock

Exchange during 1987-1997... Long-term performance is not only based on company products,

markets and financing, but originates also from within the company. This research finds that an

IPO (or the preparation for an IPO) can cause changes within a company. These IPO-related

changes are not necessarily financial but they can contribute positively to long-term

performance.”

Cogliati, Paleari, Vismara (2010) write: “The aftermarket performance is measured using

Buy-and-Hold Abnormal Returns (BHAR), see Loughran and Ritter (1995), which are calculated

for stock i over a time period T as follows

where Ri,t is the return of stock i at the time t, and N is the number of stocks in the portfolio.

Trauten, Schulz (2006) researched the IPOs long time performances in Germany: “We

study the performance of an investment in each IPO by comparing the buy-and-hold return of

each IPO to the buy-and-hold benchmark return irrespective of the IPO point in calendar time.

As we ignore calendar time, this analysis resembles an event study methodology. Several

different approaches to measuring long-term performance of stocks in event time are discussed

in the literature. Among the most established methodologies are the Buy-and-Hold Abnormal

Return approach (BHAR) firstly mentioned by Cusatis, Miles and Woolridge (1993), the

( )

( ) ( )

, ,

1

, ,

1 1 1

1 1,

11 1 ,

T

i T i t

t

N T T

i t M t

i t t

BHR R

BHAR R RN

=

= = =

= + − = + − +

∏

∑ ∏ ∏

71

Cumulative Abnormal Return approach (CARs) by Fama et al. (1969) and the Wealth Relative

method by Ritter (1991).

In the case of each IPO investments strategies, Trauten, Schulz (2006) use the following

formulas to calculate the buy-and-hold abnormal return and the mean of the buy-and-hold

abnormal returns:

where Ri,t is the total return of firm i in the calendar month t, following the IPO,

RB,i,t is the total return of a benchmark portfolio for firm i in calendar month t for a

maximum holding period H,

wi = 1/N in case of investment strategy 1,

wi = market value of firm i at the end of the IPO month / sum of market values of all

firms at the end of the respective IPO months in case of investment strategy 2.

In the case of IPO-portfolio investment strategies, Trauten, Schulz (2006) calculate the

excess buy-and-hold abnormal return of investment strategies S={3,4} for a formation period of

F months and a sample period of τ = Τ calendar months

where Ri,τ = return of firm i in calendar month τ,

Rb,t,τ = return of the benchmark portfolio b for firm i in calendar month τ,

NF,τ = number of firms that went public in the F months prior to calendar month τ,

wi,τ = 1 in case of each IPO is weighted equally (equally weighted strategy 3),

wi,τ = market value of firm i in calendar month τ divided by the sum of the market values

of all firms NF,τ in calendar month τ (value weighted strategy 4).

Tab. 23 provides some information on the research works to study the long-run

performance of IPOs in Trauten, Schulz (2006).

( ) ( )

( ) ( )

, , , ,

1 1

, , ,

1 1 1

1 1 ,

1 1 ,

H T

H i i t B i t

h h

N H TS

H i i t B i t

i h h

BHAR R R

BHAR w R R

= =

= = =

= + − +

= + − +

∏ ∏

∑ ∏ ∏

, ,

, , , , , ,

1 1 1 1

1 1 ,F FN NT T

S

F T i i i b i

i i

BHAR w R w Rτ τ

τ τ

τ τ τ ττ= = τ= =

= + − +

∏ ∑ ∏ ∑

72

Tab. 23. Long-run performance of IPOs in Germany (after Trauten, Schulz (2006)).

Among a big number of interesting researches on the long term performance of IPOs, it

is necessary to higlight the research in Serve (2004), who investigated a change in the operating

performance of 115 firms that go public on the French New Market over the period 1996-2000:

“A significant decline in operating performance subsequent to the Initial Public Offering (IPO)

is found. Companies appears to sustain sales growth but not capital expenditure after the IPO.

Additionally, there is a significant negative relation between post-IPO change in operating

performance and equity retention by the original ownership.”

The long term performance of the initial public offering of company equity at stock

exchanges has been researched in Ibbotson (1975), Ritter (1991), Carter, Dark, Singh (1998),

Dhatt, Kim, Lim (1993), Levis (1993), Keloharju (1993), Leleux (1993), Leleux, Muzyka (1997),

Gerstein (1995, 1996), Kim, Krinsky, Lee (1995), Spiess, Affleck-Graves (1995), Barber, Lyon

(1996a, 1997), Barber, Lyon (1996b), Barber, Odean (2008), Kothari, Warner (1996), Kothari,

Warner (1997), Lee, Taylor, Walter (1996), Aussenegg (1997), Brav, Gompers (1997), Brav

(2000), Steib, Mohan (1997), Su, Fleisher (1997), Sapusek (1998), Theoh, Welch, Wong (1998b),

Spiess, Affleck-Graves (1999), Brown (1999), Dechow, Hutton, Sloan (1999, 2000), Khurshed,

Mudambi, Goergen (1999), Lyon, Barber, Tsai (1999), Reuschenbach (2000), Sapusek (2000),

73

Stehle, Ehrhardt, Przyborowsky (2000), Chan, Wang, Wei (2001), Degeorge, Derrien (2001a),

Eckbo, Norli (2001), Eckbo, Norli (2002, 2005), Gerke, Fleischer (2001), Gompers, Lerner

(2001, 2003a, b), Jakobsen, Sørensen (2001), Severin (2001), Van Frederikslust, Van der Geest

(2001), Blondell, Hoang, Powell, Shi (2002), Gao, Mao, Zhong (2002), Kutsuna, Okamura,

Cowling (2002), Barondes, Nyce, Sanger (2003), Clarke, Dunbar, Kahle (2003), Goergen,

Khurshed, McCahery, Renneboog (2003), Gounopoulos (2003), Kraus, Burghof (2003),

Neuhaus, Schremper (2003), Schultz (2003), Chahine (2004a), Kooli, Suret (2004), Lubig

(2004), Alvarez, Gonzalez (2005), Drobetz, Kammermann, Wälchli (2005), Jaskiewicz,

Gonzàlez, Menéndez, Schiereck (2005), Pandey (2005), Gajewski, Gresse (2006), Pastor-Llorca,

Poveda-Fuentes (2006), Arnold, Fishe, North (2007), Cassia, Vismara (2009), and by some

other authors.

Information absorption by investors on company equity value in time of

initial public offering of company equity at stock exchanges in imperfect

highly volatile global capital markets with induced nonlinearities

Let us explain that the absorption theory has been created to understand the nature of

absorption processes of different chemical compounds in the various physical – chemical

systems, which have been observed in the well known experiments in the physics and chemistry.

This theory has been further developed by the prominent researchers at the world class research

institutions and top league universities in a number of countries over the centuries. Let us

emphasis some of the completed theoretical and experimental research projects to study the

absorption phenomena in the material sciences:

1. The absorption of the different radioactive chemical elements and their isotopes in the

soft condensed matter in the nuclear physics have been researched in Ledenyov O P, Neklyudov

(2013), Neklyudov, Dovbnya, Dikiy, Ledenyov O P, Lyashko (2013), Neklyudov, Ledenyov O P,

Fedorova, Poltinin (2013a, b), Neklyudov, Fedorova, Poltinin, Ledenyov O P (2013), Ledenyov

O P, Neklyudov, Poltinin, Fedorova (2012a, b), Neklyudov, Ledenyov O P, Fedorova, Poltinin

(2012).

2. The absorption of the electromagnetic signals in the condensed matter (the metals and

superconductors) at the ultrasonic frequencies in the solid state physics has been investigated in

Ledenyov O P (2012a, b, c), Ledenyov V O, Ledenyov D O, Ledenyov O P, Tikhonovsky (2012),

Ledenyov O P, Fursa V P (2012), Shepelev, Ledenyov O P, Filimonov (2012a, b, c, d, e).

74

3. The absorption of the electromagnetic signals in the sub-surface layers in the

condensed matter (the high temperature superconducting ceramics and dielectrics) at the ultra

high frequencies in the solid state physics has been studied in Ledenyov D O, Mazierska, Allen,

Jacob (2012), Leong, Mazierska, Jacob, Ledenyov D O, Batt (2012), Mazierska, Ledenyov D O,

Jacob, Krupka (2012), Jacob, Mazierska, Ledenyov D O, Krupka (2012), Mazierska, Krupka,

Jacob, Ledenyov D O (2012), Jacob, Mazierska, Leong, Ledenyov D O, Krupka (2012), Jacob,

Mazierska, Krupka, Ledenyov D O, Takeuchi (2012), Mazierska, Jacob, Ledenyov D O, Krupka

(2012), Ledenyov D O (2013), Ledenyov D O, Ledenyov V O (2012e).

In the econophysics, the absorption phenomena can frequently be observed in the frames

of the evolving learning process at the various practical settings and applications in the

economics and finances. A new perspective on the learning and innovation with the particular

research focus on the absorptive capacity has been presented in Cohen, Levinthal (1990), Farina

(2008), Hussinger (2010, 2012). There are a few innovative studies, which have been focused on

the knowledge and information absorptive capacity by the firm in Farina (2008): “According to

Cohen and Levinthal’s (1990) “absorptive capacity” concept, firms’ ability to get knowledge and

information from their external environment is a function of the firms’ specialization choices and

experiences. In particular, firms operating in many market segments are likely to possess more

internal capabilities than firms operating in few market segments since, as the volume and

complexity of information in the environment increase, the organization needs to have

correspondingly high levels of information processing capacity (Miller and Chen (1994);

Hambrick, (1982); Khandwalla (1973)).” Farina (2008) continues to explain: “In fact firms’

ability to use network ties for accessing information about opportunities and choices otherwise

not available is depending on internal resource endowments and in particular on “absorptive

capacity”. In our case, the absorption effect has place during the information absorption process

by the investors on the company equity value at the IPO. Therefore, the influence by the

absorption process on the investors decisions, regarding the IPOs is in the scope of our present

research interest. In our opinion, every company creates the barriers to entry; defines the

strategic boundaries; and encounters the limits to growth, using the accumulated knowledge base

(the firm-level technology absorption capacity), in the specific industry in Chandler (1962,

1998; 1977, 1993; 1980; 2001; 2005). In an analogy with the above described research results,

we would like to highlight the fact that the investors learn about the listed company by absorbing

the information on the company, aiming to get the deep and broad knowledge on the company’s

barriers to entry; strategic boundaries; and limits to growth in the process of investment

decision making. The learning processes by the individual and institutional investors have been

75

discussed in Yao-Min Chiang, Hirshleifer, Yiming Qian, Sherman (2010): “This evidence

indicates that individual investors are subject to naïve reinforcement learning. When individual

investors receive high returns from previous auctions, they become more optimistic about

receiving high returns from future auctions, making them more likely to participate in future

auctions and to bid more aggressively. In sharp contrast, there is little sign that institutional

bidders are subject to this bias. Their decisions to participate in an IPO auction are unrelated to

their past returns. Furthermore, their returns do not decline with experience as they bid in more

auctions, and their auction selection and bid shaving abilities do not deteriorate with experience.”

Here, let us consider the meanings of the deep knowledge and the broad knowledge as described

in Moldoveanu, Martin (2001): “The general knowledge – knowledge that can be easily taught

and transferred by means of formalized dialects – and specific knowledge – knowledge that

cannot be easily encoded and transferred. However, within each different kind of knowledge we

can talk of a distinction between the depth of the knowledge and the breadth of the knowledge.

Knowledge is deep when it is of the sort that can answer many concatenated ‘why?’ questions.

The physicist’s and the mathematician’s knowledge are examples of deep knowledge. It has a

hierarchical structure, with a few basic propositions at the top of the hierarchy, from which all

other propositions follow by self-evident steps. Knowledge is broad when it can be used to

answer many questions of the type: ‘what?’, ‘where?’, ‘who?’ and ‘how?’. The economist’s and

the biologist’s knowledge are examples of broad knowledge. There are few key fundamental;

assumptions that can compress all of this knowledge, which consists of a large set of empirical

findings and basic causal mechanisms which only work when certain conditions come about.”

We would like to make the following research proposals:

1. We propose that the information absorption by the investors occurs in the evolving

learning process about the company’s equity value, taking to the consideration the fundamental

purpose of investing and the responsibilities of investors. The fundamental purpose of investing

is explained in Porter (2013): “The fundamental purpose of investing is to deploy capital to

productive uses in the real economy.” The responsibilities of investor are discussed in Porter

(2013): “Beyond allocating capital, investors also play a vital role in monitoring what companies

are doing, pushing for transparency, and intervening to catalyze change if the capital employed

isn’t generating the economic value it should.” We would like to add that the investors have to

invest the capital into the companies, which create the “shared value,” generating the economic

value in a way that also produces the value for the society by addressing its challenges.

2. We think that the information absorption capacity by the investors on the company

equity value at the IPO impacts the investor’s investment decisions and serves as a pre-

76

determinant of the successful IPO deal completion. We propose the Ledenyov theory on the

origins of the underpricing and long term underperformance effects, which states that the

underpricing and long term underperformance can be explained by the changing information

absorption capacity by the investors on the company equity value, depending on both:

1) The internal factors:

a) The investor’s ability to conduct the creative imperative integrative intelligent

conceptual co-lateral adaptive logarithmic thinking with the application of the inductive,

deductive and abductive logics analysis as far as the fundamental value of company

equity is concerned;

b) The ultra fast decoding of acquired information on the fundamental value of

company equity;

c) The ultra fast processing of acquired information on the fundamental value of

company equity.

2) The external factors:

a) The presence of the asymmetric information on the fundamental value of

company equity between the investors and the underwriters (issuers);

b) The agency problems in relation to the fundamental value of company equity;

3. In agreement with the recent scientific findings in the research on the strategy selection

problems in Porter (1979, 1980, 1982a, b, 1983, 1985, 1987a, b, 1991, 1994a, b, 1996a, b, 1997,

2001a, b, 2008, 2013), Porter, Harrigan (1981), Porter, Salter (1982), Montgomery, Porter

(1991), Porter, Rivkin (2000), Porter, Sakakibara (2004), Anand, Bradley, Ghemawat, Khanna,

Montgomery, Porter, Rivkin, Rukstad, Wells, Yoffie (2005), Porter, Kramer (2006), Grant

(2001), Besanko, Shanley, Dranove (2007), Gavetti, Rivkin (2007), Teece, Winter (2007), Martin

(1998-1999b, 2005-2006b); we think that the winning virtuous investment strategies can only

be selected by the investors with the highest information absorption capacity through the

decision making process on the IPO investment choices at the selected stock exchange in the

imperfect highly volatile global capital markets with the nonlinearities; applying the

econophysical econometrical analysis in Amemiya (1985), Greene (2008) with the use of the

inductive, deductive and abductive logics in Martin (1998-1999, 2005-2006) in the frames of the

strategic choice structuring process, that is the winning through the distinctive choices process

in Martin (1998-1999a, 2005-2006a, 2004, 2009), Moldoveanu, Martin (2001), Lafley, Martin

(2013), as well as aiming to get the certain financial return and make a positive social impact in

the local community and society in Foerster (2004), Hull (2005-2006).

77

4. We advocate for the responsible investing as in Porter (2013): “Directing capital to

companies that can use it productively is ultimately the most profound benefit investors can have

on society.” We have the strategic vision that the best time moment for the Initial Public

Offering of the company’s equity at the selected stock exchange in the global capital markets

with the nonlinearities can only be selected, using the Vacheron Constantin Patrimony

Traditionnelle Caliber 2755 high precision timepiece.

Conclusion

This innovative research considers the complicated problem of the initial public offering

of the company equity at the stock exchanges in the global capital markets with the

nonlinearities. We compare the initial listing requirements on the main, parallel, new, and

unregulated growth markets. We analyze the IPO techniques: the fixed-price offerings, auctions,

and book-building issues. We focus on the IPO initial underpricing, long-run performance and

after market liquidity problems. We made the following original research propositions:

1. We propose that the information absorption by the investors occurs in the evolving

learning process about the company’s value, taking to the consideration the fundamental

purpose of investing and the responsibilities of investors. The fundamental purpose of investing

is explained in Porter (2013): “The fundamental purpose of investing is to deploy capital to

productive uses in the real economy.” The responsibilities of investor are discussed in Porter

(2013): “Beyond allocating capital, investors also play a vital role in monitoring what companies

are doing, pushing for transparency, and intervening to catalyze change if the capital employed

isn’t generating the economic value it should.” We would like to add that the investors have to

invest the capital into the companies, which create the “shared value,” generating the economic

value in a way that also produces the value for the society by addressing its challenges.

2. We think that the information absorption capacity by the investors on the IPOs impacts

the investor’s investment decisions and serves as a pre-determinant of the successful IPO deals

completion. We propose the Ledenyov theory on the origins of the underpricing and long term

underperformance effects, which states that the underpricing and long term underperformance

can be explained by the changing information absorption capacity by the investors on the

company equity value, depending on both:

1) The internal factors:

a) The investor’s ability to conduct the creative imperative integrative intelligent

conceptual co-lateral adaptive logarithmic thinking with the application of the inductive,

78

deductive and abductive logics analysis as far as the fundamental value of company

equity is concerned;

b) The ultra fast decoding of acquired information on the fundamental value of

company equity;

c) The ultra fast processing of acquired information on the fundamental value of

company equity.

2) The external factors:

a) The presence of the asymmetric information on the fundamental value of

company equity between the investors and the underwriters;

b) The agency problems in relation to the fundamental value of company equity.

3. In agreement with the recent scientific findings in the research on the strategy selection

problems in Porter (1979, 1980, 1982a, b, 1983, 1985, 1987a, b, 1991, 1994a, b, 1996a, b, 1997,

2001a, b, 2008, 2013), Porter, Harrigan (1981), Porter, Salter (1982), Montgomery, Porter

(1991), Porter, Rivkin (2000), Porter, Sakakibara (2004), Anand, Bradley, Ghemawat, Khanna,

Montgomery, Porter, Rivkin, Rukstad, Wells, Yoffie (2005), Porter, Kramer (2006), Grant

(2001), Besanko, Shanley, Dranove (2007), Gavetti, Rivkin (2007), Teece, Winter (2007), Martin

(1998-1999b, 2005-2006b); we think that the winning virtuous investment strategies can only

be selected by the investors with the highest information absorption capacity through the

decision making process on the IPO investment choices at the selected stock exchange in the

imperfect highly volatile global capital markets with the nonlinearities; applying the

econophysical econometrical analysis in Amemiya (1985), Greene (2008) with the use of the

inductive, deductive and abductive logics in Martin (1998-1999, 2005-2006) in the frames of the

strategic choice structuring process, that is the winning through the distinctive choices process

in Martin (1998-1999a, 2005-2006a, 2004, 2009), Moldoveanu, Martin (2001), Lafley, Martin

(2013), as well as aiming to get the certain financial return and make a positive social impact in

the local community and society in Foerster (2004), Hull (2005-2006).

4. We advocate for the responsible investing as in Porter (2013): “Directing capital to

companies that can use it productively is ultimately the most profound benefit investors can have

on society.” We have the strategic vision that the best time moment for the Initial Public

Offering of the company’s equity at the selected stock exchange in the global capital markets

with the nonlinearities can only be selected, using the Vacheron Constantin Patrimony

Traditionnelle Caliber 2755 high precision timepiece.

79

Acknowledgement

The authors think that the young scientists, professors, subject experts and business

leaders would find themselves absorbed by our enormously informative research article on the

virtuous winning strategies towards the initial public offerings of company equities at the various

stock exchanges in the global capital markets with the nonlinearities.

The first author’s knowledge on the origins of the nonlinearities in the complex systems

in the electrical, electronic, and computer engineering as well as the financial engineering has

been strongly influenced by the intensive scientific collaboration with Prof. Janina E. Mazierska,

Personal Chair, Electrical and Computer Engineering Department, James Cook University,

Townsville, Australia and former Dean, Electrical and Computer Engineering Department,

James Cook University, Townsville, Australia, and former IEEE Director Region 13 in Australia,

and IEEE Fellow. Prof. Janina E. Mazierska helped the first author to develop both the logical

mathematical analysis skills and the abstract scientific thinking ability to tackle the complex

scientific problems on the nonlinearities in the microwave superconductivity as well as on the

nonlinearities in the finances, applying the interdisciplinary scientific knowledge together with

the advanced computer modeling skills during the innovative research projects at James Cook

University in Townsville, Australia in 2000 – 2014 after the graduation from V. N. Karazyn

Kharkov National University in Kharkov, Ukraine in 1994 – 1999.

The first author would like to thank the professional stuff at the central library at the

James Cook University in Townsville in Australia for providing all the necessary support with

the literature search on the subjects of his multidisciplinary research interest in the electronic

databases, replying to his numerous requests timely and making everything possible to help the

first author to complete his highly innovative research at the James Cook University in

Townsville in Australia in 2000 – 2014.

The second author appreciates Prof. Roger L. Martin, former Dean of Rotman School of

Management, University of Toronto for the multiple exchanges by the thoughtful scientific

opinions as well as his assistance with the high level organization of intensive research work on

the North American IPOs database compiling at the financial laboratory and the scientific library

at Rotman School of Management, University of Toronto in Canada in 2005 – 2006.

The second author would like to appreciate a series of long hours thoughtful discussions

on the IPO techniques and trends in Western Europe and North America in 20 and 21st centuries

with Prof. Geoffrey G. Jones, Harvard Business School, which took place at the University of

80

Toronto in Canada in 2006. The minutes of our scientific discussions have been recorded and

analyzed in the process of the research article writing at the later date.

The second author takes this opportunity to thank all the researchers from the leading

league universities and institutions and business partners from the hi-tech industries, who made

the significant research contributions on the topic of our research interest in time of the

numerous scientific discussions, invited presentations and international conferences over the last

20 years since the time of his graduation from V. N. Karazyn Kharkov National University in

Kharkov, Ukraine in 1988 – 1993.

We are very grateful to Prof. Michael E. Porter, Bishop William Lawrence University

Professor and Dean of Harvard Business School, Harvard University, who contributed his

valuable efforts and time to write the interesting informative research articles and to provide us

with his professional expertise and exceptional quality professional advices in the field of

competitive strategy.

We acknowledge the numerous “meetings without the ties” with the Australian

philosophers, professors, scientists, businessmen, lawyers and political leaders in the relaxing

trusted mutual-respect atmosphere during the Yara valley and Mornington-Peninsula limo wine

tours by Limo Wine Tours Co. (www.limowinetours.com.au), which inspired the authors to

complete the highly innovative research article in Australia in 2014.

*E-mail: dimitri.ledenyov@my.jcu.edu.au

81

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